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Tether, the world’s largest stablecoin by market capitalization, has bounced back from a turbulent year that saw its rivals collapse, its assets plunge and its regulatory scrutiny intensify. Today, Tether has almost recouped all of the market value it lost in the wake of the TerraUSD meltdown in May 2022, when a faulty algorithm triggered a massive sell-off of cryptocurrencies.
According to CoinMarketCap, Tether had assets worth about $81.4 billion backing its USDT token as of April 21, 2023, just shy of its peak of $83 billion a year ago. The amount of USDT in circulation typically rises during bull markets and falls during bear markets, reflecting its role as a medium of exchange and store of value in the crypto ecosystem.
Tether’s resilience is remarkable given the challenges it faced in the past year. Not only did it have to cope with the fallout of TerraUSD’s implosion, which briefly pushed USDT below its $1 peg, but it also had to deal with the failure of another algorithmic stablecoin, FTX, in November 2022. FTX was backed by a basket of cryptocurrencies and had ambitions to rival Tether, but it collapsed after Binance, one of its major investors, pulled out of a deal to buy a stake in the exchange.
Tether also faced increased regulatory pressure from authorities around the world, who expressed concerns about the transparency and stability of stablecoins. Tether has been under investigation by the New York Attorney General since 2019 for allegedly misleading investors about its reserves and engaging in market manipulation. In February 2022, Tether reached a settlement with the NYAG and agreed to pay $18.5 million in fines and submit regular reports on its reserves.
Tether claims that its USDT tokens are fully backed by a reserve of cash and cash-equivalents, but it has been reluctant to provide a full audit of its holdings. In May 2022, Tether released a breakdown of its reserves for the first time, revealing that only 2.9% of its assets were cash, while 65% were commercial paper, or short-term debt instruments issued by corporations. The quality and liquidity of these assets have been questioned by critics, who argue that Tether could face solvency issues if there is a run on USDT.
Despite these doubts, Tether has managed to maintain its dominance in the stablecoin market, thanks to several factors. One is the banking turmoil that has affected some of its competitors, such as Circle’s USD Coin (USDC), which had to switch banks several times due to regulatory uncertainty. Another is the strong demand for USDT from traders and investors in Asia, especially China, where crypto exchanges are banned but peer-to-peer transactions are still possible using USDT. A third is the crypto rally that has boosted the value of Bitcoin and other cryptocurrencies since the start of 2023.
Tether’s future prospects depend largely on how regulators will treat stablecoins going forward. Some jurisdictions, such as Singapore and Switzerland, have adopted a more favorable approach, granting licenses or approvals to some stablecoin issuers. Others, such as the US and the EU, have signaled a more cautious stance, proposing stricter rules or bans on some types of stablecoins. Tether will have to comply with these regulations or risk losing access to some markets.
Tether’s success also depends on how well it can fend off competition from other stablecoins that may offer more transparency, innovation or diversity. Some examples are Dai, a decentralized stablecoin that is backed by crypto collateral; TerraUSD, which has relaunched with a new algorithm and governance structure; and FTX Token (FTT), which is being developed by FTX Exchange as a potential replacement for USDT.
Tether has proven to be a survivor in the volatile world of crypto. But it will have to continue to adapt and evolve if it wants to remain the king of stablecoins.
