Consensus in the Rift: Tether and the New Global Financial Order
The de facto central bank of the industry? Why is the U.S. regulatory attitude towards it so conflicted? What does its existence mean for the U.S. financial market? In this tug-of-war, where is its breaking point?
Author: YettaS
USDT has become the most important liquidity tool in the offshore market due to its widespread circulation and large asset scale globally. However, our questions about Tether have never ceased: Why is Tether said to be the de facto central bank of our industry? Why is the U.S. regulatory attitude towards it so ambivalent—neither completely suppressing it nor providing clear support? What does its existence 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.
What Makes Tether a Good Business?
Tether's latest Q3 data showcases its strong profitability. As of Q3, its total assets reached $125 billion, with approximately $102 billion in U.S. Treasuries, a net profit of $2 billion for Q3, and a cumulative profit of $7.7 billion for the year. In comparison, BlackRock's Q3 profit was $1.6 billion, and Visa's was $4.9 billion, while Tether's staff count is less than one percent of theirs, with productivity over a hundred times greater.
source: primitive ventures
Source: Primitive Ventures
In fact, Tether did not have a spectacular start; it began with a small demand. At that time, all exchanges had BTC trading pairs, and prices were fluctuating on both sides, making settlement inconvenient. Bitfinex identified this issue and launched USDT as a unit of account (UoA), which was its first use case. In 2019, Sun discovered the cross-chain demand for stablecoins between exchanges; ETH transfers to U were expensive and slow, while on Tron they were cheap and fast. Sun immediately began subsidizing and capturing the market on a large scale, spending hundreds of millions (of course, from Tron node profits) to subsidize TRC20-USDT exchange deposits and withdrawals, allowing users to enjoy returns of 16%-30% at that time. As a medium of exchange (MoE) for inter-exchange transfers, this was its second use case. The subsequent story is well-known: USDT was widely adopted in the off-chain world as a store of value (SoV) in countries with severe inflation, and as a medium of exchange (MoE) in various gray areas, becoming the shadow dollar, which was its third use case. Through three evolutions, Tether has grown alongside the market capitalization and liquidity of USDT.
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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 similar to a U.S. government money market fund, namely high asset safety and ample liquidity. As a SoV, its safety is higher than that of deposits, which carry risks from the bank's asset side; the impact of SVB's bankruptcy on USDC is an example, while government bonds 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 merely products for sale and cannot become the currency 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. As the nominal shadow dollar and the most widely accepted 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, something unimaginable before the advent of crypto. Its network effect expands as liquidity grows, which cannot be overturned by simply distributing a 5% yield to users and using token vampire attacks.
With this in mind, we can understand why PayPal wants to issue a stablecoin. As its business expands, it has already achieved capital accumulation and payment settlement, and stablecoins are the best vehicle for all of this. From another perspective, won't American banks and money market 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 eliminate Tether because the custody of U.S. Treasuries is very centralized. Moreover, since Tether was investigated by the Department of Justice in 2021 and transferred to the prominent prosecutor of the Southern District of NY, Darmian Williams, at the end of 2022 (who handles almost 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 why don't they want to?
First, there is the liquidity risk in the U.S. Treasury market. Since 80% of Tether's assets are in U.S. Treasuries, if regulators take extreme measures to restrict it, forcing Tether to sell off Treasuries on a large scale, this could trigger turmoil or even a collapse in the Treasury market. This is the "too big to fail" aspect.
More importantly, USDT's global expansion as a shadow dollar. In regions with severe global inflation, USDT is seen as a means of value storage; in areas with financial sanctions and capital controls, USDT becomes the currency for underground transactions; it can be seen in places involving terrorism, drugs, fraud, and money laundering. As USDT is used in more countries through more channels and scenarios, its anti-fragility will be greatly enhanced. This is the "too deep to fail" aspect.
The Federal Reserve must be pleased with this. On the surface, the Federal Reserve has a dual mission of maintaining price stability and achieving full employment, but at a deeper level, it aims to strengthen dollar hegemony and control global capital flows. It is precisely the widespread circulation of USDT and USDC that helps the dollar expand its offshore liquidity. USDC is a regulated on/off-ramp tool for dollars, while USDT, through its extensive channels, permeates the dollar globally. The underground banking system and gray remittance services of USDT effectively facilitate dollar circulation 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 the Resistance to Tether Comes From
Although Tether has helped sustain U.S. financial hegemony in various ways, its game with U.S. regulators still exists. Hayes once said, "Tether can be shut down by the U.S. banking system overnight, even if it is operating completely according to the rules."
First, it cannot support the Federal Reserve's monetary policy. As a fully reserved stablecoin, Tether does not adjust liquidity with the Federal Reserve's monetary policy and cannot participate in the Fed's quantitative easing or tightening like commercial banks. This independence, while enhancing its credibility, also makes it difficult for the Fed to achieve its monetary policy goals through it.
Second, the Treasury must be wary of the turmoil it could cause in the Treasury market. If Tether were to collapse due to unforeseen events, it would have to sell off a large amount of Treasuries, putting immense pressure on the Treasury market. This was widely discussed at the Treasury's borrowing advisory committee meeting on October 29, considering whether it is possible to directly tokenize Treasuries to mitigate USDT's impact on the Treasury market.
Finally, and most importantly, Tether effectively squeezes the survival space of banks and money market funds. The high liquidity and high yields of stablecoins attract more and more users, posing a significant challenge to banks' deposit-absorbing capabilities and the attractiveness of money market funds. Meanwhile, Tether's business is highly profitable, so why can't banks and money market funds do the same? The introduction of the Lummis-Gillibrand Payment Stablecoin Act this April, which encourages more banks and trust institutions to participate in the stablecoin market, is a testament to this.
Tether's development is indeed a grand struggle, burdened by original sins of regulatory arbitrage that provided it with tremendous opportunities and space for growth. Now, it finally has some leverage to begin to contend with 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 thinking more deeply about how to construct 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 at asset reserve diversification 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 begins at the margins, germinating in the cracks of the old era's beliefs. The reverence for Rome turned the dominance of Roman civilization into a "self-fulfilling prophecy."
The birth of a new god may be random, but the twilight of the old gods is already destined.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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