Author: YettaS
USDT has become the most important liquidity tool in the offshore market with its wide circulation and huge asset size around the world, but we have never stopped questioning Tether: Why is Tether the de facto central bank of our industry? Why is the attitude of US regulators so torn - neither completely suppressing it nor giving clear support? What does its existence mean to the US financial market? In this tug of war, where is its breakthrough point? This article will help you think about the significance of stablecoins from a more macro perspective, which is the premise for breakthroughs in this field.
What makes Tether such a good business?
Tether's latest Q3 data shows its extraordinary profitability. As of Q3, its total assets reached $125 billion, with approximately $102 billion in U.S. Treasuries, and a net profit of $2 billion in Q3, totaling $7.7 billion in annual profit. In contrast, BlackRock's Q3 profit was $1.6 billion, and Visa's was $4.9 billion, while Tether's headcount is less than one percent of theirs, resulting in productivity that is more than a hundred times theirs.
Source: Primitive Ventures
Source: Primitive Enterprises
In fact, Tether did not have a spectacular beginning; it started with a small demand. At that time, all exchanges had BTC trading pairs, and prices on both sides were fluctuating, making settlement very inconvenient. Bitfinex discovered this problem and launched USDT as a unit of account (UoA), which was the first scenario it found; in 2019, Sun discovered the demand for cross-chain stablecoins between exchanges. ETH to U was both expensive and slow, while on Tron it was cheap and fast. Sun immediately began large-scale subsidies to seize market share, spending hundreds of millions (of course from Tron node earnings) to subsidize TRC20-USDT exchange deposits and withdrawals, where users could enjoy yields of 16%-30% at that time. As a trading medium (MoE) for inter-exchange transfers, this was the second scenario it found; 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 hyperinflation, and as a trading medium (MoE) in various gray areas, becoming the shadow dollar, which was its third scenario. Through three evolutions, Tether grew alongside USDT's market value and liquidity.
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Source: Glassnode
Source: Glassnode
Currently, over 80% of Tether's assets are invested in U.S. Treasuries, which gives Tether characteristics akin to a U.S. government-style money market fund, namely high asset safety and ample liquidity. As a SoV, its safety is higher than that of deposits, which carry bank asset-side risks. The impact of SVB's bankruptcy on USDC is one example, while Treasuries are the lowest risk financial products.
At the same time, it also outperforms money market funds because money market funds do not have currency settlement functions; they are simply products for sale and cannot become the currency itself. This is also why Tether has such high productivity; USDT, as an MoE, significantly reduces the friction in currency circulation compared to existing cross-border settlement or payment channels. As a nominal shadow dollar and the strongest consensus UoA, various channels and exchange platforms have become Tether's workers helping it expand its network globally.
This is the charm of the currency business. Tether combines payment, settlement, and treasury management, effectively becoming the Federal Reserve of our industry, which is unimaginable without crypto. Its network effect expands as liquidity increases, and this cannot be disrupted simply by sharing a 5% yield with users and using token vampire attacks.
With this in mind, we can understand why PayPal is launching a stablecoin. As it expands its business, it has already achieved fund accumulation and payment settlement, and stablecoins are the best vehicle for all of this. From another perspective, won’t American banks and currency funds be envious of this business?
From 'too big to fail' to 'too deep to fail'
It is actually very simple for the U.S. to take down Tether because the custody of U.S. Treasuries is very centralized. Moreover, since Tether was investigated by the Justice Department in 2021 and transferred to the hotshot prosecutor of the Southern District of NY, Darmian William, at the end of 2022 (who is in charge of basically all high-profile 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 not wanting to?
First, there is the liquidity risk in the U.S. Treasury market. 80% of Tether's assets are U.S. Treasuries, and if regulators take extreme restrictive measures that force Tether to sell off Treasuries on a large scale, this could trigger turmoil or even a crash in the Treasury market. This is 'too big to fail'.
More importantly, the global expansion of USDT as a shadow dollar. In areas severely affected by global inflation, USDT is seen as a means of value storage; in regions with financial sanctions and capital controls, USDT becomes the currency for underground transactions; it can be seen in places involved with terrorist organizations, drugs, fraud, and money laundering. As USDT is used in more countries, through more channels and in more scenarios, its anti-fragility will be significantly enhanced. This is 'too deep to fail'.
In this regard, the Federal Reserve must be pleased, as it has a dual mandate of maintaining price stability and achieving full employment on the surface, but on a deeper level, it is about strengthening dollar hegemony and controlling global capital flows. It is precisely the widespread circulation of USDT and USDC that helps the dollar expand its offshore liquidity. USDC serves as a regulated on/off ramp tool for dollars, while USDT, with its extensive channels, permeates the globe. The underground banking system and gray remittance services of USDT effectively facilitate the circulation of dollars 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 American financial hegemony from multiple aspects, its game with U.S. regulators still exists. Hayes once said, 'Tether could 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. Tether, as a fully reserved stablecoin, will not adjust liquidity according to the Federal Reserve's monetary policy, and cannot participate in the Federal Reserve's quantitative easing or monetary tightening like commercial banks. While this independence enhances its credibility, it also makes it difficult for the Federal Reserve to achieve its monetary policy objectives through it.
Secondly, the Treasury must be cautious of the turmoil it may cause in the U.S. Treasury market. If Tether were to collapse due to an unexpected event, it would have to sell a large amount of Treasuries, which would put enormous pressure on the Treasury market. This was widely discussed at the Treasury’s borrowing advisory committee on October 29, whether it might be possible to directly tokenize Treasuries to mitigate the impact of USDT on the Treasury market.
Lastly and most importantly, Tether is effectively squeezing the survival space of banks and money market funds. The high liquidity and high yield of stablecoins have attracted more and more users, posing a huge challenge to banks' deposit-raising capabilities and the attractiveness of money market funds. Meanwhile, Tether's business is incredibly profitable, so why can’t banks and money market funds do the same? In April of this year, the Lummis-Gillibrand Payment Stablecoin Act was proposed, encouraging more banks and trust institutions to participate in the stablecoin market as evidence.
The development of Tether is, in fact, a magnificent history of struggle, with regulatory arbitrage burdened by original sin providing it with tremendous development opportunities and space. Now, there is finally some leverage to begin to contend with old powers. Where it can go is uncertain, but any breakthrough innovation represents 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 the role of global payments and liquidity but also in thinking more deeply about how to build a truly supranational currency system. I believe its key lies in its linkage with BTC. In 2023, Tether took the lead in this step, allocating 15% of its profits to invest in Bitcoin, which not only diversifies its asset reserves but also effectively makes BTC an important 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 declining beliefs of the old era. The worship of Rome turned Roman civilization's dominance over the world into a self-fulfilling prophecy.
The birth of a new deity may be random, but the twilight of the old gods is already destined.
