Original author: YettaS
Reprinted: Daisy, Mars Finance
With its extensive global circulation and large asset scale, USDT has become the most important liquidity tool in the offshore market. However, our questions about Tether have never ceased: why do people say Tether is the de facto central bank of our industry? Why is the U.S. regulatory attitude toward it so ambivalent—neither fully suppressing it nor providing clear support? What does its existence really mean for the U.S. financial market? In this tug-of-war, where is its breaking point? This article will help you think about the significance of stablecoins from a more macro perspective, which is a prerequisite for breakthroughs in this field.
How is Tether such a good business?
Tether's latest Q3 data showcases its strong profitability. As of Q3, its total assets reached $125bn, with about $102bn in U.S. Treasury bonds. Q3 net profit was $2bn, with total annual profit of $7.7bn. In comparison, BlackRock's Q3 profit was $1.6bn, and Visa's was $4.9bn, while Tether's workforce is less than 1% of theirs, achieving productivity over a hundred times theirs.
source: primitive ventures In fact, Tether did not have a spectacular start; it began with a small demand. At that time, all exchanges only had BTC trading pairs, with prices fluctuating on both sides, making settlement inconvenient. Bitfinex identified this problem and introduced USDT as the unit of account (UoA), which was its first identified scenario. In 2019, Sun discovered the demand for stablecoins in cross-chain transactions between exchanges; ETH transfers to USDT were both expensive and slow, while those on Tron were cheap and fast. Sun immediately began massive subsidies to capture the market, spending hundreds of millions (of course, from Tron node profits) to subsidize TRC20-USDT transactions at exchanges, where users could enjoy returns of 16%-30% at that time. This was its second identified scenario as a medium of exchange (MoE) for transfers between exchanges. The subsequent story is well known; USDT was widely adopted in the off-chain world, serving as a store of value (SoV) in countries with severe inflation, and as a medium of exchange (MoE) in various gray areas, effectively becoming the shadow dollar, which is its third scenario. Through these three evolutions, Tether has grown alongside the market capitalization and liquidity of USDT. For more detailed guidance on how to build a stablecoin, Dovey's article provides comprehensive teaching, welcome to learn.
source: Glassnode Currently, over 80% of Tether's assets are invested in U.S. Treasury bonds, which gives Tether the characteristics of a government-type money market fund, i.e., high asset safety and sufficient liquidity. As a SoV, its safety is higher than deposits, which carry risks from the bank's asset side; the impact of SVB's bankruptcy on USDC is one example, while Treasury bonds are the lowest risk financial products. Furthermore, it outperforms money market funds because money market funds do not have currency settlement functions; they are merely sold products and cannot become currency circulation itself. This is also why Tether has such high productivity. USDT, as an MoE, significantly reduces friction in currency circulation compared to existing cross-border settlement or payment channels, and as the nominal shadow dollar with the strongest consensus as UoA, various channels and exchange platforms have become the workforce helping Tether expand its network globally. This is the allure of the currency business; Tether combines payment, settlement, and treasury management, effectively making it the Federal Reserve of our industry, things that were unimaginable before crypto. Its network effect expands with liquidity; this cannot be overturned simply by distributing 5% yield to users and using token vampire attacks. Speaking of this, we can understand why PayPal wants to issue a stablecoin because, with the expansion of its business, it has already achieved capital accumulation and payment settlements, and stablecoins are the best vehicle for all of this. So, from another perspective, will U.S. banks and money market funds not envy this business?
From being too big to fail to being too deep to fail
It is actually very simple for the U.S. to eliminate Tether because the custody of U.S. Treasury bonds is very centralized. Moreover, since Tether was investigated by the Department of Justice in 2021 and transferred to the prominent prosecutor in the Southern District of NY, Darmian William, at the end of 2022 (who handles basically all high-level crypto crime cases, including the SBF case), it is not that it cannot be done, but that they do not want to. So, what is the reason for this reluctance? First, it is the liquidity risk in the U.S. Treasury bond market. 80% of Tether's assets are U.S. Treasury bonds, and if regulators take extreme restrictive measures that force Tether to massively sell off these bonds, it could trigger turmoil or even a crash in the U.S. Treasury market. This is the 'too big to fail' concept. More importantly is the global expansion of USDT as the shadow dollar. In regions with severe global inflation, USDT is seen as a means of storing value; in areas under financial sanctions and capital controls, USDT becomes the currency for underground transactions; it can even be seen in places related to terrorist organizations, drugs, fraud, and money laundering. The more countries and channels that use USDT in various scenarios, the greater its anti-fragility will become. This is the 'too deep to fail' aspect. The Federal Reserve would certainly welcome this, as publicly it has a dual mission of maintaining price stability and achieving full employment, but at a deeper level, it aims to strengthen the dollar's hegemony and control global capital flows. USDT and USDC's widespread circulation helps the dollar expand its offshore liquidity. USDC is a regulated on/off ramp tool for dollars, while USDT, with its extensive channels, penetrates the dollar into the global market. USDT's underground banking system and gray remittance services essentially facilitate the circulation of the dollar and cross-border payments. This helps the U.S. continue to play a dominant role in the global financial order, further deepening dollar hegemony.
Where does the resistance to Tether come from?
Although Tether has helped sustain U.S. financial hegemony in many ways, the game of cat and mouse with U.S. regulators still exists. Hayes once said, 'Tether can be shut down by the U.S. banking system overnight, even if it follows all the rules.' First, it cannot support the Federal Reserve's monetary policy. As a fully reserved stablecoin, Tether does not adjust liquidity in response to Federal Reserve monetary policy changes and cannot participate in the Federal Reserve's quantitative easing or tightening like commercial banks. This independence, while enhancing its credibility, makes it difficult for the Federal Reserve to achieve its monetary policy goals through it. Secondly, the Treasury must be wary of the potential turmoil it could cause in the U.S. Treasury market. If Tether were to collapse due to unforeseen events, it would have to sell off a large amount of Treasury bonds, putting immense pressure on the Treasury market. This was widely discussed at the Treasury's borrowing consultation committee on October 29, where the possibility of tokenizing Treasury bonds to alleviate USDT's impact on the Treasury market was considered. Finally, and most importantly, Tether essentially squeezes the living space of banks and money market funds. The high liquidity and high returns of stablecoins attract more and more users, posing a significant challenge to banks' deposit absorption capabilities and the appeal of money market funds. Meanwhile, Tether's business is too profitable; why can't banks and money market funds do the same? The Lummis-Gillibrand Payment Stablecoin Act proposed this April, which encourages more banks and trust institutions to participate in the stablecoin market, is a testament to this. Tether's development is essentially a magnificent history of struggle, burdened by original sin and regulatory arbitrage, which has provided it with tremendous opportunities and space for development. Now, it finally has some leverage to start countering old powers. Where it can go is uncertain, but any groundbreaking innovation is a redistribution of past power and interest structures.
The possibility of a supranational currency system
To transcend the dollar system, Tether's future lies not only in maintaining its role in global payments and liquidity but also in deeper thinking about how to build a truly supranational currency system. I believe the key lies in its linkage with BTC. In 2023, Tether took the lead in this step by allocating 15% of its profits to Bitcoin, which is not only an attempt to diversify asset reserves but also effectively makes BTC an essential component supporting its stablecoin ecosystem. In the future, as Tether's payment network expands and BTC deepens its role as a supranational currency in the global market, we may witness a brand new financial order.
A revolution often starts at the margins, germinating in the cracks of the decayed beliefs of the old era. The reverence for Rome turned the dominance of Roman civilization over the world into a 'self-fulfilling prophecy.' The birth of a new god may be random, but the dusk of the old gods is already determined.
