Starting from Tether and Ripple's "shouting": Is USDT really risky?

Author: jk, Odaily Planet Daily

Recently, remarks from senior executives at Ripple have once again put USDT in the spotlight. Ripple CEO Brad Garlinghouse pointed out that the U.S. government may target Tether as its next regulatory focus, a statement that has sparked widespread attention and discussion in the market. Although Tether insists on the transparency and compliance of its USDT, doubts surrounding its potential risks continue to arise.

The War of Words Between USDT and Ripple

Chronologically, the recent war of words between Ripple and USDT can be summarized as follows:

On May 6, Ripple's Chief Technology Officer David Schwartz revealed several upcoming integration plans at the XRP Las Vegas conference. He introduced information related to the XRP Ledger, including automated market makers (AMM), lending protocols, Ripple stablecoins, and artificial intelligence. Schwartz stated that detailed information about Ripple's stablecoin will be announced at the XRPL Apex event in Amsterdam in June.

Earlier reports indicated that Ripple plans to issue a stablecoin backed by the U.S. dollar. The company stated that this stablecoin is expected to be launched later this year and will be 100% backed by U.S. dollar deposits, short-term U.S. government bonds, and other cash equivalents. This stablecoin will initially be deployed on Ripple's institution-focused XRP Ledger and the Ethereum blockchain, based on the ERC-20 token standard.

On May 13, Ripple CEO Brad Garlinghouse stated in a recent interview that the next target of the U.S. government is Tether, the company responsible for the circulation of the USDT stablecoin. He believes that Tether is an important part of the cryptocurrency market ecosystem, but he is uncertain how this will affect other areas of the market. Some experts believe that the CEO's statement is a significant insider message, and if it indeed happens, there could be substantial selling pressure in the USDT stablecoin market, potentially leading to a sharp decline in USDT's price.

On the same day, USDT CEO Paolo Ardoino publicly countered Ripple on Twitter: "A CEO leading a company under investigation by the SEC has launched a competing stablecoin and is spreading fear about USDT."

In response, Ripple CEO Brad Garlinghouse stated: "I am not attacking Tether… The next thing I said in the podcast is that I believe Tether is a very important part of the ecosystem. My point is that the U.S. government has clearly indicated that they want more control over issuers of dollar-backed stablecoins, and therefore, Tether, as the largest participant, is in their sights."

Meanwhile, a noteworthy piece of news is that on April 25, Maxine Waters, the Democratic leader of the House Financial Services Committee, predicted that she and Chairman Patrick McHenry would soon reach an agreement on stablecoin regulatory legislation. Waters stated in an interview: "We are working to achieve a stablecoin bill in the short term." She added that she has discussed stablecoins with Senate Majority Leader Chuck Schumer and Senate Banking Committee Chairman Sherrod Brown, indicating that the Federal Reserve, the Treasury Department, and the White House are all involved in drafting the bill. The impact of this bill on current stablecoin issuers remains unclear.

Will It Be a Trigger: Why Does USDT Use Bitcoin as a Reserve Asset?

According to USDT's official transparency report, all reserve assets are listed: cash and cash equivalents and other short-term deposits account for 84.05% of total reserves, broken down as follows: U.S. government bonds account for 79.88%, overnight reverse repurchase agreements account for 12.2%, term reverse repurchase agreements account for 0.9%, money market funds account for 6.77%, cash and bank deposits account for 0.11%, and non-U.S. government bonds account for 0.13%. These assets are highly liquid and secure, forming the core of Tether's reserves, which is generally also the core of major stablecoin protocols. However, Bitcoin accounts for 4.87% of this portion, which is the core point of contention.

The core point of stablecoins should be to maintain the peg of the token to the U.S. dollar. In this regard, to maintain the stability of USDT, it seems that there should not be any cryptocurrency-related assets in the reserve assets to isolate USDT's correlation. If an event similar to FTX occurs, theoretically, there would be a large number of USDT redemption requests and Bitcoin selling demands in the market. If there is a connection between the two, it could potentially form a death spiral: market issues arise -- sell Bitcoin -- the value of USDT's reserve assets declines -- USDT decouples -- market panic increases, leading to a run on USDT, resulting in more Bitcoin being sold. From this perspective, USDT should indeed not include Bitcoin in its reserve assets. In contrast, USDC's reserve assets consist solely of real-world assets.

The benefit is that Bitcoin can diversify reserve assets, helping to reduce the risks associated with the volatility of a single asset. The most important function is that Bitcoin can hedge against fiat currency risks, reducing the degree of binding with the U.S. dollar and U.S. Treasury bonds in the reserve assets. Holding Bitcoin can protect Tether from the depreciation of fiat currencies (such as the U.S. dollar), and Bitcoin may provide better long-term value storage in certain situations, adding a layer of security to Tether's overall reserves. Additionally, aligning with the cryptocurrency ecosystem is one of the reasons Tether chose Bitcoin. As a cryptocurrency, Bitcoin aligns more closely with Tether's positioning in the cryptocurrency ecosystem as a reserve asset.

However, Tether's current excess reserves amount to $6,261,866,717, which is 6.02% of its total liabilities. This means that even if all the Bitcoin in Tether's asset pool were to disappear overnight, theoretically, it should not cause Tether to decouple.

Pros and Cons

According to reports, Tether's net profit in the first quarter of 2024 exceeded $4.52 billion, setting a historical high. Based on this data, analysts indicate that USDT has actually become the most successful project in the RWA sector of the cryptocurrency field and a symbol of the U.S. dollar's significant influence in the cryptocurrency space. Therefore, the U.S. government has no reason to trouble Tether. Additionally, this profit margin greatly reduces the belief that Tether will rug: maintaining the current profit margin for operations will yield far more than the one-time gains from a rug pull.

However, many KOLs believe that since most stablecoins are dollar-denominated, whether it is Tether or Circle, the status of dollar-denomination will not change. On the contrary, KOL Mr. Man stated: "Allow me to say what Ripple cannot express directly. Tether is not directly regulated by government agencies such as the Financial Crimes Enforcement Network (FinCEN) or the Federal Reserve. It is merely registered with FinCEN for reporting purposes, which is not the same as being regulated. Tether operates from the British Virgin Islands, outside the jurisdiction of major financial regulatory agencies, and its reserves lack transparency and oversight. Nevertheless, Tether must provide monthly attestations; as required by the New York State Department of Financial Services (NYDFS), but they only provide quarterly attestations. I look forward to a crackdown on USDT under pressure."