Tether: Challenge the hegemony of the USD, champion in CBDC and beyond

A memorable occasion took place in 2008 with the publication of the Bitcoin (BTC) white paper. With the author Satoshi Nakamoto explicitly calling for the deconstruction of financial intermediaries, regulators around the world have been wary, especially as Wall Street experienced one of the biggest crises since the 1930s. While Bitcoin's lack of a stable price mechanism has prevented it from becoming a widely accepted medium of exchange, Tether (USDT) – one of the first stable coins developed by Tether Ltd. – addressed this.

In 2014, Tether Ltd. issued its namesake stablecoin, Tether. As the earliest dollar-backed stablecoin, Tether claimed that every unit of USDT is 100% backed by its dollar reserves. After China cracked down on crypto exchanges in 2017, traders got into trouble trading crypto assets with fiat currencies. For example, Tether was initially used as a means of transportation of value. However, Tether became the most accessible entry point for traders after China further tightened the cryptocurrency ban that year, spurring rapid growth of one of the major assets in the cryptocurrency market.

Recently, Tether has been scrutinized by traditional financial institutions and regulators who believe it could threaten US dollar hegemony as a result of accelerated massive acceptance of USDT for cross-border credit transfers, payment and settlement, foreign exchange and payroll.

Tether has surpassed its original application, going from a quote currency in crypto asset trading to an alternative currency that can facilitate cross-border credit transfers and payment settlement.

As of 2019, approximately $ 212 billion in money was transferred or settled via USDT. In short, despite its short history and relatively low market penetration, Tether has already created alternative currency markets separate from traditional monetary and financial systems.

Most importantly, USDT is increasingly flowing into areas inaccessible to dollars. In short, it effectively functions as a more efficient and flexible form of the dollar. In addition, Tether operates as a distributed network outside the competence of the US banking system and a centralized monetary policy. As penetration increases, authorities increasingly see Tether as a threat to dollar hegemony.

The US Federal Reserve uses the dollar in two ways to preserve hegemony. First, it uses the dollar's status as the dominant global currency to influence global monetary policy. Second, it can control the flow and circulation of the dollar through the US-controlled global payment and settlement systems, namely SWIFT, Visa and Mastercard.

Since World War II, the United States has played a leading role in shaping the global monetary system. The dollar's hegemony allowed it to maintain a dominant position in the financial system while boosting economic growth. As such, the monetary policy of the US Federal Reserves has a direct impact on the global monetary, financial and trading markets.

For example, by using its balance sheet, the Federal Reserve can periodically collect foreign dollars and debt to improve the competitiveness of trade. In addition, SWIFT's dominance around the world further enhances the Federal Reserve's control over the flow and circulation of dollars and US dominance.

Through the SWIFT network, the United States has the ability to block international settlements by other countries – a move that is hitting heavily sanctioned countries.

As an audit-proof form of currency, Tether disrupts U.S. control of the dollar's circulation and weakens the Fed's influence on monetary policy.

Since the current monetary paradigm is based on centralized control, Tether is a threat to the control and influence of the Federal Reserve. As a form of currency independent of the dollar, it has created a new distributed system that threatens to replace the traditional banking system. Since Tether's network is unaffected by the Fed's tightening and loosening dollar policy, it also threatens US influence against dollar hegemony.

In addition, Tether is also able to bypass the SWIFT system by creating a decentralized system that can penetrate both sanctioned and under-served regions. By leveraging the trusted nature of blockchain, Tether can deliver improved efficiency and eliminate human risk, as well as the central banking and payment system. In short, the existence of Tether threatens the relevance and strength of centralized banking systems.

Tether users are unable or unwilling to access US dollar services through compliant financial channels. Either way, users are willing to bear higher costs compared to the dollar. This premium is derived from channel costs that end users pay to fiat channels through fiat channels.

Tether further demonstrates Tether's impact on Federal Reserve control and has opened new doors for the dollar – namely in regions or countries with weak sovereign currencies and immature banking services. By conquering under-served populations, Tether is further promoting the dollar and further decoupling the dollar from the Federal Reserve's monetary policy.

As USDT usage and applications are gaining popularity, the value is likely to continue to grow alongside the network. This, coupled with significant improvements in blockchain's underlying technology, will continue to challenge the financial and monetary hegemony of the dollar and the US.

Open new doors

As Tether continues to rise, the U.S. is expected to investigate it thoroughly by 2022. Nevertheless, it has already transformed global financial and monetary markets by creating new opportunities.

In recent years, Tether has been increasingly scrutinized by regulators, particularly regarding stability and risks. According to documents filed with the New York Attorney General in April 2019, only about 74% of the supply of USDT is supported by the dollar, raising demand for a possible run. In addition, Tether's decentralized nature makes it more difficult to implement protections and mitigate risks – a common challenge shared by many cryptocurrencies. For example, from 2018 to 2019, losses from fraud and theft increased from $ 1.7 billion to $ 4.4 billion.

So if the pressure on the dollar continues to increase as a result of the economic downturn and the rising deficit in the United States, the US may decide to ban the use of USDT by all compliant entities registered in the country. Since USDT is not registered in the United States, this move may not kill Tether, but would force the project to rely on an offshore dollar system while limiting its operations.

In the future, developing countries with weaker sovereign currencies will experience accelerated dollarization as Tether, Libra and other stablecoins take over local markets. However, countries and regions such as China, the United Kingdom and the European Union will accelerate the development of the central bank's digital currencies to better compete in tomorrow's foreign exchange market.

Nevertheless, Tether has already changed the way millions approach money, banks and finance by offering a new system based on decentralization. Leading regions and countries are already racing to develop and launch stable coins to enter and compete in this new monetary market. In doing so, these government-backed new assets and currencies could erode the dollar's status as a global reserve currency, weakening US influence and strengthening domestic stability – a vision shared by the UK, the EU and China.

On the other hand, other countries with relatively weak sovereign currencies can dollarise as a result of stablecoins. While Tether may reduce US monetary intervention, its presence in under-served markets may adversely affect national sovereignty and financial stability.

As Tether shows, stablecoins pave an alternative path forward by cutting away dollar hegemony while driving innovation. China is already taking the step with Digital Currency Electronic Payment to promote the internationalization of the digital yuan, while the UK, Switzerland and the Netherlands are leading the development of a CBDC. Even the US, despite its previous reluctance, is now discussing the possibility of developing a digital dollar. Thanks to Tether, we are now entering a new era of currency innovation – and competition – as the smart economy of the future gets closer.

The opinions, thoughts and opinions expressed here are only of the author and do not necessarily reflect the opinions and opinions of Cointelegraph.

Da Hongfei is best known for co-founding the blockchain-based "Smart Economy" network Neo with Erick Zhang in 2014. Da received his education from South China University of Technology and obtained degrees in technology and English. He worked at a consulting firm until 2013, after which he learned programming before founding Neo. Along with Zhang, Da also founded OnChain – a commercial blockchain company that provides services to private companies.