With its widespread circulation and massive asset scale, USDT has become the most critical liquidity tool in offshore markets. Yet, questions surrounding Tether never cease. Why is Tether often referred to as the de facto central bank of our industry? Why is the U.S. regulatory stance on it so ambivalent—neither fully suppressing it nor explicitly endorsing it? What does its existence truly mean for the U.S. financial market? And in this tug-of-war, where is its breakthrough point?

This article offers a more macroeconomic perspective to rethink the significance of stablecoins—a prerequisite for advancing this field.

Why is Tether Such a Profitable Business?

Tether’s latest Q3 financial data highlights its extraordinary profitability. As of Q3, its total assets reached $125 billion, including approximately $102 billion in U.S. Treasury bonds. It reported a Q3 net profit of $2 billion, bringing its total annual profit to $7.7 billion. For comparison, BlackRock’s Q3 profit was $1.6 billion, and Visa’s was $4.9 billion. Remarkably, Tether operates with a fraction of the workforce of these giants, boasting per-employee productivity hundreds of times greater.

Source: Primitive Ventures

Tether didn’t start as a revolutionary idea. Its origins stemmed from addressing a specific need in the market. In its early days, cryptocurrency exchanges predominantly operated BTC trading pairs, making transactions cumbersome due to price fluctuations on both ends. Bitfinex identified this inefficiency and introduced USDT as a unit of account (UoA), marking its first use case.

In 2019, Justin Sun recognized the demand for stablecoins in cross-chain transactions between exchanges. Ethereum-based USDT transfers were slow and costly, while Tron’s network was faster and cheaper. Sun seized the opportunity, heavily subsidizing TRC20-USDT deposit and withdrawal fees at exchanges, spending billions (primarily funded by Tron node rewards). At the time, users could enjoy returns of 16%–30% on these transactions. This established USDT as a medium of exchange (MoE) for inter-exchange transfers, representing its second use case.

The rest is history. USDT has been widely adopted in the off-chain world. In countries plagued by hyperinflation, it serves as a store of value (SoV). In various gray markets, it acts as a medium of exchange (MoE). USDT has effectively become a “shadow dollar,” representing its third major use case. With each evolutionary step, Tether has grown alongside the market capitalization and liquidity of USDT.

For a detailed guide on building a successful stablecoin, Dovey’s article provides comprehensive insights—highly recommended for further reading.

Source: Glassnode

Currently, over 80% of Tether’s assets are invested in U.S. Treasury bonds, giving Tether characteristics akin to a U.S. government money market fund: high asset security and ample liquidity.

As a store of value (SoV), Tether is inherently safer than bank deposits, which are exposed to risks on the banks’ asset side. The collapse of SVB and its impact on USDC serve as a prime example, whereas U.S. Treasuries are considered the least risky financial instrument.

At the same time, Tether surpasses money market funds because money market funds lack a monetary settlement function. They are merely financial products and cannot themselves facilitate the circulation of money. This is one of the reasons for Tether’s exceptional per-employee productivity. USDT, as a medium of exchange (MoE), significantly reduces the friction in money circulation, far outperforming existing cross-border settlement or payment channels. Additionally, as a de facto “shadow dollar” and the most widely accepted unit of account (UoA) in the crypto space, Tether leverages an extensive network of channels and exchange platforms, effectively turning them into its workforce to extend its reach globally.

This is the allure of the currency business. By combining payments, settlements, and treasury management, Tether has become the crypto industry’s equivalent of the Federal Reserve. Such a model was unimaginable before the advent of cryptocurrency. Its network effect grows in tandem with its liquidity—a phenomenon not easily disrupted by offering a 5% yield or employing token-based “vampire attacks.”

This understanding sheds light on why PayPal launched its own stablecoin. As PayPal’s business expanded, it had already achieved capital accumulation and streamlined payment and settlement processes. Stablecoins present the ideal vehicle for taking these capabilities further.

From another perspective, it’s worth asking: Will U.S. banks and money market funds envy Tether’s business model?

From “Too Big to Fail” to “Too Deep to Fail”

The United States could easily take down Tether if it wanted to. U.S. Treasury securities are highly centralized in custody, and Tether has been under investigation by the Department of Justice (DOJ) since 2021. By the end of 2022, the case was handed over to Damian Williams, the high-profile prosecutor from the Southern District of New York, whose docket includes major crypto-related cases such as the SBF case. So the question isn’t whether the U.S. can take action against Tether but rather why it hasn’t.

Liquidity Risk in the U.S. Treasury Market

The primary reason is the liquidity risk posed to the U.S. Treasury market. Around 80% of Tether’s assets are held in U.S. Treasury securities. If regulators imposed severe restrictions on Tether, forcing it to liquidate these holdings en masse, the result could be significant turmoil or even a collapse in the Treasury market. This exemplifies the “too big to fail” principle.

The Global Expansion of the Shadow Dollar

A more critical factor is the role of USDT as a global “shadow dollar.” In regions experiencing severe inflation, USDT is viewed as a store of value. In areas with financial sanctions or capital controls, USDT acts as a currency for underground transactions. USDT is also widely used in illicit activities, including terrorism financing, drug trafficking, scams, and money laundering. As USDT usage expands across more countries, channels, and scenarios, its antifragility strengthens. This represents the “too deep to fail” phenomenon.

The Federal Reserve’s Perspective

The Federal Reserve likely welcomes this situation. Officially, the Fed’s dual mandate is to maintain price stability and achieve full employment. However, at a deeper level, it aims to bolster the dominance of the U.S. dollar and control global capital flows. The widespread adoption of USDT and USDC plays a crucial role in enhancing the offshore liquidity of the dollar.

• USDC serves as a regulated on-and-off-ramp tool for the dollar.
• USDT, leveraging its extensive channels, spreads the dollar into global markets, particularly through its underground banking networks and gray-market remittance services.

Effectively, USDT facilitates dollar circulation and cross-border payments, indirectly supporting the U.S. in maintaining its dominance in the global financial system. This deepens the dollar’s hegemony and reinforces its central role in international finance.

Where Does Tether Face Resistance?

Although Tether plays a significant role in extending U.S. financial hegemony, it continues to face challenges in its relationship with U.S. regulators. As Arthur Hayes once remarked, “Tether can be shut out of the U.S. banking system overnight, even if it operates entirely by the book.” This resistance arises from several key factors:

1. Incompatibility with Federal Reserve Monetary Policy

Tether, as a fully-reserved stablecoin, operates independently of Federal Reserve monetary policy. Unlike commercial banks, it does not participate in quantitative easing (QE) or tightening cycles, nor does it adjust its liquidity in response to the Fed’s policy changes. While this independence enhances Tether’s credibility, it limits the Fed’s ability to use Tether as a tool to achieve its monetary policy objectives.

2. Risks to the U.S. Treasury Market

The U.S. Treasury Department is wary of Tether’s potential impact on Treasury market stability. If a sudden crisis caused Tether to collapse, the stablecoin might be forced to liquidate its substantial holdings of U.S. Treasury securities, putting enormous pressure on the market. This risk was a significant topic during the Treasury Borrowing Advisory Committee meeting on October 29, where discussions included whether tokenizing U.S. Treasuries could mitigate the influence of USDT on the market.

3. Competition with Banks and Money Market Funds

Tether’s high liquidity and attractive yields are drawing an increasing number of users, posing a direct threat to the deposit-gathering capacity of traditional banks and the appeal of money market funds. Stablecoins like Tether offer financial utility that is increasingly luring away customers from these traditional institutions. Moreover, Tether’s profitability raises the question: why can’t banks and money market funds enter this space?

The introduction of the Lummis-Gillibrand Payment Stablecoin Act in April serves as evidence of this tension. The act encourages greater participation by banks and trust institutions in the stablecoin market, reflecting the desire to reclaim some of the space occupied by Tether.

Tether’s rise can be seen as a remarkable story of navigating adversity. Built on regulatory arbitrage—a foundational “original sin”—Tether exploited the gaps in oversight to achieve rapid growth. Today, it finds itself at a crossroads, capable of challenging entrenched financial institutions in some respects.

However, the road ahead remains uncertain. Any disruptive innovation inevitably reshapes the distribution of power and interests within existing systems. Tether’s journey is no exception, as it continues to redefine the boundaries of global finance and confront the legacy structures it disrupts.

The Potential of a Supranational Monetary System

To surpass the U.S. dollar system, Tether’s future lies not only in maintaining its role in global payments and liquidity but also in exploring the deeper potential to construct a truly supranational monetary system. A key element in this vision, I believe, is pegging to Bitcoin (BTC).

In 2023, Tether took a pioneering step by allocating 15% of its profits to Bitcoin, marking not just an attempt to diversify its asset reserves but effectively making BTC a critical component of its stablecoin ecosystem. This strategic move positions Bitcoin as a foundational asset supporting Tether’s financial network.

As Tether’s payment networks expand and Bitcoin’s role as a supranational currency deepens in global markets, we may witness the emergence of a new financial order.

Revolutions often begin at the edges, sprouting from the cracks of a declining old order. The veneration of Rome once enabled Roman civilization to dominate the world—a self-fulfilling prophecy rooted in collective belief. Similarly, the rise of new paradigms in finance starts with the erosion of outdated faith in existing systems.

The birth of a “new god” may seem random, but the twilight of the “old gods” is inevitable.

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