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The USDT printing press has recently stopped. USDT’s parabolic growth in market value came to a sudden halt in late May, just as Bitcoin prices were retreating from their all-time highs. Since then, with Bitcoin trading between roughly $30,000 and $40,000, a new round of discussion has linked the two events and answered an old question: Has Tether stopped driving up Bitcoin’s price? Figure | USDT market value vs Bitcoin market value (Source: Glassnode) Yet analysts and market participants who spoke to CoinDesk said the sudden pause in USDT issuance is a sign that the dominance of the world’s most traded cryptocurrency is under threat from three unprecedented challenges that have combined to create a perfect storm that could shake up the stablecoin: trouble in its largest geographic market is making it difficult for traders there to buy USDT with fiat; one of USDT’s most promising competitors appears to be gaining market share; and regulatory pressure is growing around the world. While acknowledging that demand for USDT has declined, a Tether executive believes the trend is not limited to USDT. “Tether’s demand ebbs and flows and has been impacted by a drop in demand in recent weeks,” Tether Chief Technology Officer Paolo Ardoino said in a written response via a spokesperson, noting that USDT isn’t the only stablecoin to have seen a drop in demand. The domestic crackdown on bitcoin mining and trading has hammered the price of bitcoin, which is now down 52% from its all-time high of $64,928.14 in April to around $31,000. But another casualty of China’s new crackdown on cryptocurrencies is USDT, a stablecoin whose success is largely due to its dominance among domestic traders and investors, who often use the dollar-pegged stablecoin as a gateway into crypto markets through over-the-counter brokers, as fiat-deposit trading remains illegal in China. Last month, Chinese police arrested more than 1,000 people for money laundering, saying they used cryptocurrencies to help them evade legal sanctions. Such actions against OTC merchants may help explain why USDT's growth in China has slowed significantly. A partner at Amber Group, a Hong Kong-based cryptocurrency asset management company, said: “It is extremely difficult to deposit funds in China. Many over-the-counter traders have stopped trading.” As Bitcoin struggles to break through the current $30,000 to $35,000 range, there is no incentive for new funds to enter the cryptocurrency market in the country. “Tether’s market in Asia is mainly through over-the-counter traders, and as the amount of money entering the market decreases, the demand for Tether also decreases,” said the former vice president and founding partner of Singapore-based cryptocurrency investment firm Matrixport. Hong Kong-based crypto lender Babel recently told CoinDesk it lowered its USDT deposit rates due to weak demand for the stablecoin. However, a Babel spokesperson would not reveal the reason for the recent drop in demand. China’s crackdown on cryptocurrency-related money laundering appears to be continuing. A report from the South China Morning Post late Wednesday said Hong Kong Customs had busted a local money laundering ring that used cryptocurrencies, specifically USDT, to process about $155 million worth of illicit funds, marking the first crackdown on such activity in Hong Kong. Dan Burke, managing director of institutional sales for Asia Pacific at digital asset custodian BitGo, said the news from Hong Kong could force any trading desks in Singapore and Hong Kong to reconsider the USDT/USD pair. While demand for USDT appears to have dried up, the rising star of the stablecoin market, USDC, is increasingly shining. USDC is another stablecoin pegged to the US dollar and backed by cryptocurrency financial services company Circle. Boston-based Circle recently announced plans to go public via a special purpose acquisition company (SPAC), not long after the company revealed its goal to expand USDC to up to 10 blockchains beyond Ethereum. Justin Sun’s Tron is one of the latest blockchains to start supporting USDC. According to Circle’s website, one of the goals of doing so is to promote the growth of USDC in Asia and around the world. Currently, there is more USDT on Tron than Ethereum, as traders in Asia prefer blockchains that offer faster and cheaper transactions. This makes USDC’s entry into Tron a more enticing proposition. “I think USDC has a chance to compete with USDT in the Asian stablecoin market, which needs diversified infrastructure, as customers in Asia are looking for more stablecoin options,” Sun told CoinDesk. The former vice president and founding partner of Singapore cryptocurrency investment company Matrixport said that unlike USDT, which mainly relies on OTC channels, Asian investors can easily buy USDC due to the humanized customer service provided by Circle, which operates the stablecoin business. It is comfortable to do business with USDC, and once you submit the required documents, they usually have a manager to communicate with you via email. It’s too early to tell whether USDC can defeat USDT’s dominance in Asia, but USDC has already won in another white-hot field of cryptocurrency: decentralized finance (DeFi). According to Glassnode data, nearly 50% of USDC’s supply is currently locked in smart contracts, while the ratio for USDT is 20%. Figure | USDT vs USDC supply percentage locked in smart contracts (Source: Glassnode) Messari research analysts said: "USDC is increasingly being used for on-chain and payment use cases, which continue to grow. USDT is mainly used for exchange settlement and margin for derivatives, and as the market cools, its use cases have decreased." Cryptocurrency bear market vs Tether’s vulnerability A lingering issue for USDT, its reputation in the cryptocurrency community, is the third hurdle facing the world’s largest stablecoin by assets. “The market is filled with bearish sentiment and traders are looking for reasons why,” said Noelle Acheson, head of market insights at cryptocurrency prime brokerage Genesis Global Trading. “This is the season of FUD (fear, uncertainty and doubt), and USDT’s fragility is almost always part of the FUD.” According to Acheson, the market is “desperate” for an explanation as to why prices are so “deflated,” and as long as the company behind the dollar-pegged stablecoin remains unclear about its foreign exchange reserves, USDT is a perfect target. Recently, regulators and governments around the world have raised more questions about USDT and other stablecoins. On Wednesday, Federal Reserve Chairman Jerome Powell answered questions from Rep. Anthony Gonzalez about Tether's assets while testifying before the U.S. House Financial Services Committee. According to information disclosed in May, nearly half of Tether's assets are unspecified commercial paper. “Commercial paper is short-term, overnight debt of corporations, and most of the time it’s investment grade, most of the time it’s very liquid, which are all good things, but in a crisis, the market disappears,” Powell said. “And that’s when people want their money. It’s very simple. These are very similar economic activities to bank deposits and money market funds, and they need to be regulated in a similar way.” The growth of the USDC/USDT pair on Binance reflects some of the bearish sentiment associated with regulatory concerns. The pair is currently the most active in the spot market, including the USDC stablecoin. In other words, traders on Binance are trading between USDC and USDT, perhaps betting that the price of USDT will fall, or at least because they find more utility in USDC. Hassan Bassiri, vice president of Arca, an asset management company based in Los Angeles, said that some traders may borrow USDT and exchange it for USDC. You know that USDC is worth $1, so you borrow USDT in exchange for USDC. If USDT is not fully backed, you can use USDC to buy back USDT at a price lower than $1. The former vice president of matrixport said that to be sure, a counter-argument to the increase in USDC/USDT trading volume on Binance is that many small-cap tokens on Binance only have USDT trading pairs. In fact, according to data from Coingecko, AXS, the latest popular token launched by Axie Infinity, has trading pairs with USDT, Binance USD (BUSD), and BNB on Binance, while there is almost no AXS/USDC trading pair on centralized exchanges. The USDC/BUSD trading pair is another popular trading pair involving USDC on Binance; it is second only to USDC/USDT, BTC/USDC, and ETH/USDC in terms of trading volume in the past 24 hours. Basiri said that if traders are shorting USDT, it is in response to FUD. However, he denied concerns about stablecoins and said that USDT is fine now and will always be fine. |
