USDT has offered a glimpse into the future of financial markets while also challenging the hegemony of today’s USD-dominant system. To that end, I’d like to offer six points regarding USDT’s impact on geopolitics and the future development of sovereign digital currency.
In 2008, a momentous occasion took place with the release of Bitcoin’s White Paper. With author Satoshi Nakamoto explicitly calling for the deconstruction of financial intermediaries, regulators around the world were put on alert, particularly as Wall Street faced one of its biggest crises since the 1930s. While Bitcoin’s lack of a stable pricing mechanism has prevented it from becoming a commonly accepted medium of exchange, USDT — one of the earliest stablecoin developed by Tether — addressed this.
In 2014, Tether Ltd. issued USDT. As the earliest USD-backed stablecoin, Tether has claimed that each unit of USDT is 100% backed by its USD reserves. With the tightening of the 2017 crackdown of crypto exchanges in China, traders encountered difficulties when trading crypto assets with FIAT currencies, thus USDT was initially used as a value exchange vehicle. However, USDT became the most accessible entry point for traders after China tightened its cryptocurrency ban in 2017, thus driving USDT’s rapid growth into one of the key assets in the cryptocurrency market.
Recently, USDT has come under intense scrutiny from traditional financial institutions and regulators, who believe that USDT could threaten USD hegemony due to accelerating mass adoption of USDT for cross-border remittance, payment and settlement, foreign exchange, and payroll.
- USDT has surpassed its original application, from a quote currency in crypto-asset trading into an alternative currency capable of facilitating cross-border remittance and payment settlements.
As of 2019, approximately 212 billions dollar of funds were transferred or settled through the USDT. In short, despite USDT’s short history and relatively low market penetration, it has already created alternate currency markets divorced from traditional monetary and financial systems.
More significantly, USDT is increasingly flowing to USD inaccessible areas. In short, USDT effectively functions as a more efficient and flexible form of the dollar. Moreover, as a distributed network, USDT operates outside the purview of the U.S. banking system and centralized monetary policy. As USDT penetration increases, authorities are increasingly viewing USDT as a threat to USD hegemony.
- The U.S. Federal Reserve leverages the USD in two ways to maintain hegemony. First, the Fed leverages USD’s status as the dominant global currency to influence global monetary policy. Second, the Fed is able to control the flow and circulation of USD through the U.S.-controlled global payment and settlement systems, namely SWIFT, Visa and Master.
Since World War II, the U.S. has played a leading role in terms of shaping the global monetary system. Thanks to dollar hegemony, the U.S. has been able to maintain a dominant position within the financial system while also driving economic growth. As such, the U.S. Federal Reserves’ monetary policy directly impacts global monetary, financial, and trade markets.
For example, by leveraging its balance sheet, the Federal Reserve is able to periodically recover foreign-owned dollars and debt to improve trade competitiveness. Moreover, the dominance of SWIFT around the world further enhances the Federal Reserves’ control over the flow and circulation of USD as well as the U.S.’ dominance. Through the SWIFT network, the U.S. possesses the ability to block international settlements by other countries — a move that would strike a major blow to sanctioned countries.
- As an audit-resistant form of currency, USDT disrupts the U.S.’ control over USD circulation while weakening the Fed’s monetary policy influence.
Given that the current monetary paradigm is predicated on centralized control, USDT represents a threat to the Federal Reserves’ control and influence. As a form of currency independent of the USD, USDT has created a new distributed system which threatens to replace the traditional banking system. Moreover, as USDT’s network is unaffected by the Fed’s tightening and easing policy of USD, it also represents a threat to the U.S.’ influence vis-a-vis USD hegemony.
Moreover, USDT is also capable of circumventing the SWIFT system by creating a decentralized system capable of penetrating either sanctioned or under-served regions. Leveraging blockchain’s trustless nature, USDT can deliver enhanced efficiency while removing human risks — as well as the central banking and payment system. In short, USDT’s existence represents a threat to the relevance and power of centralized banking systems.
- Users of USDT are either unable to or unwilling to access USD services through compliant financial channels. Regardless, users are willing to shoulder a higher cost when compared to USD. This premium is derived from channel fees paid by USDT end users to USDT minters through FIAT channels.
Further showcasing the USDT’ impact on the Federal Reserve control, it has opened new doors to USD — namely regions or countries with weak sovereign currencies and immature banking services. By capturing under-served populations, USDT is further promoting USD while further decoupling the latter from the Federal Reserves’ monetary policy.
As USDT usage and applications continue to gain steam, it is likely that its value will continue to grow alongside its network. This in conjunction with major advancements in blockchain’s underlying technology will continue to challenge the USD — and the U.S.’ — financial and monetary hegemony.
- As USDT continues to surge, it is expected that the U.S. will heavily scrutinize USDT by 2022. Nevertheless, USDT has already transformed global financial and monetary markets by creating new possibilities and opening new doors.
In recent years, USDT has been increasingly scrutinized by regulators, particularly regarding its stability and risks. Per an April 2019 survey by the New York State Attorney, only about 74% of Tether’s reserves comprise of USD, thus raising the question of a potential run. Moreover, USDT’s decentralized nature makes it more difficult to implement safeguards and mitigate against risks — a common challenge shared by many cryptocurrencies. For example, from 2018 to 2019, losses related to fraud and theft grew from USD1.7 billion to USD4.4 billion.
Thus, as pressure on the USD continues to mount due to the U.S.’ economic downturn and a mounting deficit, the U.S. may move to prohibit the use of USDT by all compliant entities registered in the U.S. Given that USDT is not registered in the U.S., this move might not kill Tether, but it would force the project to rely on an offshore USD system while restricting its activities.
- Moving forward, developing countries with weaker sovereign currencies will undergo accelerated dollarization as USDT, Libra, and other stable currencies take over local markets. However, countries and regions such as China, the UK, and the EU will accelerate the development of native central bank digital currency (CBDC) to better compete in the currency market of tomorrow.
Nevertheless, USDT has already transformed how millions approach money, banking, and finances by offering a new system based on decentralization. Already, leading regions and countries are racing to develop and launch stablecoin to enter and compete in this new monetary market. In doing so, these sovereign-backed new assets and currencies could challenge the status of the U.S. dollar as a global reserve currency, thus weakening the U.S.’ influence and bolstering domestic stability — an outlook shared by the UK, EU, and China.
On the other hand, other countries with relatively weak sovereign currencies may undergo dollarization due to stablecoins. Although USDT can mitigate against the U.S.’ monetary intervention, its presence in under-served markets may negatively impact national sovereignty and financial stability.
As demonstrated by USDT, stablecoins are paving an alternate path forward by chipping away at USD hegemony while also driving innovation. Already, China is pushing forward with DC/EP to promote RMB internationalization while the UK, Switzerland and the Netherlands are leading the development of a central bank digital currency (CBDC). Even the U.S. — despite its prior reluctance — is now discussing the possibility of developing a Digital Dollar Project. Thanks to USDT, we are now entering a new era of currency innovation — and competition — as the smart economy of the future looms ever closer.
twitter: Da Hongfei