I don't understand the mechanism by which bitUSD would track the exchange rate of paperUSD/BTS.
Let's compare it to an ETF. There, the value of the ETF tracks the value of the basket of equity/commodities or whatever else it is composed of. Speculators rationally buy the ETF when its price is below the price of the basket, because the shares of the ETF itself could be redeemed for the actual underlying basket (modulo large size and fees). Hence, the price of the ETF tracks the price of the basket due to arbitrage opportunities being available when there's a substantial disagreement between the two.
But it doesn't seem that bitUSD are redeemable for paper USD. So why would the market rationally buy bitUSD when its value (in BTS) is less than that of BTS/PaperUSD?
The idea is, people will bid whatever they think it's worth, and that price will track the 'true' price of USD. There is no physical USD being exchanged or stored, but a number of people trading on the platform will maintain that price. It's just like a prediction marketplace where equilibrium will bring it to the 'true' price. Of course, if for some reason, everyone believed that bitUSD should instead track bitCENT, then it will, but it would be unlikely.
Sorry, maybe I wasn't being clear enough. For the price to track the true USD price, its necessary that buyers would have incentive to buy when the price dips sufficiently below the true USD price. What is that incentive?
In a prediction market, the incentive is that eventually the share matures and is paid out, so there's a terminal value. Similarly in futures markets. With ETFs, there's no terminal date, but if the price of the ETF dips too low, theres an arbitrage opportunity for people to buy shares of the ETF and exchange it for a basket of the underlying.
It sounds to me like you're saying there is no such mechanism for bitUSD. Then you are just relying on putting this idea out there that the prices should track, and hoping that others believe that others believe that others believe. . . that it should. Without some type of redeemability, I don't see how anyone could believe this will actually work.