Tether Is Winning Stablecoin Battle Despite Looming Risks
Summary
Stablecoin’s value has risen by more than $5 billion in past two weeks
Tether is continuing to extend its lead in the battle for the stablecoin market. However, its growth isn’t without controversy.
Already the world’s largest stablecoin by market cap, tether’s value has increased by more than $5 billion in the past two weeks to about $79 billion, according to CoinMarketCap data.
That advance comes as its main competitors have faltered. The value of USD Coin, run by Circle Internet Financial Ltd., has shrunk by $5 billion to about $34 billion. The coin broke from its 1-to-1 peg to the dollar after Circle disclosed that it had $3.3 billion of the stablecoin’s reserves tied up in the collapsed Silicon Valley Bank.
Meanwhile, the market cap of Binance USD, the world’s third-largest stablecoin, has more than halved from November’s record after New York regulators banned the new U.S. issuance of the stablecoin.
A spokeswoman for Tether said the company remains “strong and reliable for its user base, primarily in the emerging markets and in developing countries."
“We hope our competition will improve their risk management and reliability as it’s vital that the stablecoin industry remain diverse and competitive," she added.
As U.S. regulators have stepped up actions against crypto companies and cut off their access to banking services, many companies and traders have increasingly relied on stablecoins to move money around.
Trading volumes in the stablecoin market hit $51.9 billion on March 14, according to research firm CryptoCompare, the highest one-day sum since the collapse of crypto exchange FTX in November. Of that total, nearly $42 billion was tied to tether. Elevated demand has helped tether to continue trading slightly above its $1 peg on centralized crypto exchanges such as Binance.
Tether’s success has struck some market participants as ironic. Over the years, the company has faced scrutiny from regulators and investors over its lack of transparency. It hasn’t disclosed all of its banking partners and has been promising an audit since at least 2017.
“It’s interesting that the lack of transparency has served Tether well at this moment versus Circle’s transparency," said Bobby Zagotta, chief executive of crypto exchange Bitstamp USA. “But in the long run, I would prefer transparency, and I think most investors will."
Some analysts said tether’s recent growth comes with risks. Of the 5 billion new tether tokens created since March 10, the majority were issued on the Tron blockchain, according to CoinGecko data. Tron, historically the busiest blockchain for tether trading, is under scrutiny from regulators.
The Securities and Exchange Commission on Wednesday sued Tron Foundation Limited and Justin Sun, the crypto entrepreneur behind the blockchain, claiming they broke securities laws by selling unregistered crypto tokens and artificially boosting the trading volume of TRX, Tron’s native token. Mr. Sun tweeted last week that the SEC’s complaint lacks merit.
Some investors and analysts said tether’s fate is heavily tied to that of Tron because Tether has issued more than 44 billion—or about 56%—of the eponymous token on the Tron blockchain, according to the company’s website.
Of course, Tron could settle with the SEC, limiting the risks for tether on the blockchain.
Kyle Waters, senior research analyst at crypto research firm CoinMetrics, said the Tron blockchain is particularly popular for payments and savings in high-inflation countries where demand for U.S. dollars is high. In Turkey, for example, tether is a popular cryptocurrency for Turks looking to flee the Turkish lira.
Other investors, though, are wary of having to rely on one dominant stablecoin that operates outside the U.S.
“In general, you never want to have a single point of failure in financial systems," said David Wells, chief executive of crypto-trading platform Enclave Markets. “So whether it’s liquidity concentration in one trading venue or stablecoin concentration in one issuer, it sets the industry up for potential critical infrastructure risk."
Another concern among investors is that tether’s growing dominance coincides with the decline of the overall stablecoin market. The total market cap of all stablecoins has fallen for a consecutive 12 months and stood at $133 billion as of March 20, the lowest level since September 2021, according to CryptoCompare. Meanwhile, bitcoin and ether—often perceived as riskier than stablecoins—have rallied this month on the back of the banking crisis.
Jeff Dorman, chief investment officer of crypto asset manager Arca, said the decline is partly driven by the unrest in the banking sector, which has forced investors to reconsider what qualifies as safe assets.
“It’s not surprising that overall stablecoin [assets under management] is declining as bitcoin and ether are rallying, because if you basically choke off the ability to get money in and out of the banking system through stablecoins, the safety net of a stablecoin starts to lose value," Mr. Dorman said.
