Tether (USDT), which has become an “community of interest” with U.S. Treasury bonds, has ambitious aspirations.

Originally published by Odaily Planet Daily

Original author Wenser, republished with authorization (WeChat: wenser8; Twitter: wenser2010)

On October 2, Paolo Ardoino, CEO of Tether, the issuer of USDT, stated, “USDT may have initially been just a cryptocurrency, but it is now the most widely used digital dollar globally,” expressing pride in USDT’s current predominant market position and its diversified application scenarios.

As the helmsman behind the entity responsible for the “largest stablecoin by market capitalization in the crypto asset space,” he certainly has the reason and confidence to make such a statement. After all, as a “foundational product in the crypto asset ecosystem,” stablecoins have long been regarded as the “blood of encryption.”

Following the collapse of the UST algorithmic stablecoin issued by Terraform Labs in May 2022, mainstream stablecoins pegged to U.S. Treasury bonds, such as USDT and USDC, have gradually become “cash cow businesses” within the industry that generate stable cash flows, attracting increasing attention. The market also views stablecoin flows and supply growth as one of the indicators for cycle judgment.

Odaily Planet Daily provides a brief analysis of USDT and its issuer, Tether, in this article for readers’ reference.

Tether’s Expanding Territory: Starting with Crypto Assets, Going Beyond Them

As Tether CEO Paolo Ardoino stated, USDT was initially just “a cryptocurrency,” but over time, its scope of use has extended far beyond the realm of “crypto assets,” becoming a “widely applied digital dollar.” Specifically, it has been extensively utilized in various scenarios, including cross-border payments, daily consumption, and crypto asset exchanges.

Since 2014, USDT has maintained a steady growth trajectory. In August 2021, the total market capitalization of the stablecoin sector surpassed the $100 billion mark for the first time, with USDT ranking first with a market capitalization exceeding $65 billion. According to the latest data from IntoTheBlock, the total market capitalization of USDT has currently exceeded $126 billion, setting a new historical high.(Note by Odaily Planet Daily: The Tether official website displays the net total issuance of USDT as $119,640,575,156.23.)

On July 31 of this year, Tether released its financial report for the second quarter of 2024. The data showed that its profits for the first half of 2024 reached a record high of $5.2 billion, with a net operating profit of $1.3 billion, marking its best performance in history. Furthermore, Tether’s holdings of U.S. Treasury bonds exceeded $97.6 billion, also reaching a historical high. According to previous reports from The Wall Street Journal,the funds flowing through the Tether network in 2023 were nearly equivalent to those processed by Visa, the global payment giant, with its annual net profit reaching $6.2 billion. In other words, Tether’s profits in the first half of 2024 already approached its full-year profits for 2023. By comparison, BlackRock, the asset management giant, reported a net profit attributable to common shareholders of only $5.5 billion last year. It is no wonder that many industry insiders in the crypto asset space exclaimed, “Stablecoins are truly a ‘good business’ with stable profitability!”

Data from IntoTheBlock

Specifically, the usage scenarios for USDT include the following aspects:

1. Crypto Asset Markets: The “General Equivalent” of Digital Assets

According to information on Tether’s official website, exchange users and individual users constitute its primary customer base. After all, Paolo Ardoino himself has always served as the CTO of the crypto asset exchange BitFinex, a title that remains listed in his personal account profile. Moreover, as the “general equivalent” of crypto assets, USDT has become a commonly used medium in daily transactions.

Major Exchange Partners of USDT

2. Regions with Severe Inflation: The Optimal “Substitute for National Currency”

With developments in the global economic landscape, some countries and regions are experiencing severe inflation. Building upon the “legacy” of Bitcoin’s “peer-to-peer payment system,” USDT has become a “substitute for national currency” in many inflation-hit areas.

Tether CEO Paolo Ardoino previously stated in a media interview: “In countries such as Argentina and Turkey, USDT serves as a lifeline, offering an alternative to highly volatile national currencies. Before the widespread adoption of USDT, people in countries plagued by inflation had to resort to the black market to obtain U.S. dollars (Note by Odaily Planet Daily: This is because the global economic system is denominated in U.S. dollars, and the U.S. dollar has relatively strong inflation-resistant capabilities).”

He further mentioned: “USDT works much better outside the United States. In the U.S., there are 15 different transmission layers for the dollar. You have banks, credit cards, debit cards. You have Venmo, PayPal, Cash App, and so on... But who needs a single dollar? Imagine someone living in Haiti earning $1.34 per day. How can they afford a $5 transaction fee? These markets cannot bear the cost of paying $5 or $6 per transaction on Ethereum or other chains.”

This is one of the reasons why TRON has become the blockchain network with the highest number of stablecoin transactions.Latest data shows that the total authorized amount of USDT on the TRON network reaches as high as $61.8 billion, while the total authorized amount on Ethereum is approximately $55 billion.

It is worth noting that, benefiting from stablecoin transactions and the meme coin frenzy in the TRON ecosystem previously boosted by SunPump, TRON’s total revenue in Q3 reached a record $577 million, a historical high, representing a 43% increase compared to Q2 of this year.

USDT Issuance Information

3. International Trade: A Widely Recognized “Payment Tool”

As an important component of the global economic system, international trade (including industries such as cross-border e-commerce) has an urgent demand for quick payments and a broad market. To some extent, USDT has become one of the “payment tools” recognized by multiple parties in this field. After all, compared to the complex, costly, and rule-heavy global SWIFT bank wire transfer system, the advantages of USDT are undoubtedly significant: efficient, convenient, stable, and lower in cost. These advantages are also explained on Tether’s official website.

Of course, advantages and disadvantages coexist. The convenience, anonymity, and high liquidity of USDT have also provided a “comfortable pillow” for gray and black market industries. As previously mentioned in The Wall Street Journal: “Although Tether verifies the identities of its direct clients, its vast secondary market remains unregulated. According to a United Nations report from January this year, USDT is the preferred choice for money laundering in Southeast Asia.”

Reasons Why Merchants Choose USDT

Tether’s Business Model: The “Federal Reserve” of the Crypto Asset World

A closer look at the business model behind Tether and its stablecoin USDT reveals that its revenue model and profit sources mainly stem from the following aspects:

1. U.S. Treasury Bond Yields: Interest Income from U.S. Treasury Bonds

According to U.S. Treasury bond holding data, as of July this year, Japan’s holdings amounted to $11.157 trillion; China’s holdings amounted to $776.5 billion; South Korea’s holdings amounted to $122.7 billion; and Germany’s holdings amounted to $101.6 billion. In other words, if Tether were a country, its U.S. Treasury bond holdings would be comparable to Germany’s and close to South Korea’s.

Tether CEO Paolo Ardoino previously stated bluntly: U.S. Treasury bonds provide support for USDT. If USDT holders wish to cash out, they can easily convert it into U.S. dollars. Meanwhile, interest income flows into Tether’s treasury. He added, “We [effectively] increase the resilience of dollar ownership, so now no single country or policymaker can sell hundreds of billions of U.S. Treasury bills at once. USDT and Tether are the best friends of the U.S. dollar.”

Previously, in August, he also stated that due to rising interest rates, Tether has achieved extremely high profits over the past two years, currently earning a 5.5% return from its reserves. Over the past 24 months, Tether has accumulated profits of approximately $11.9 billion. According to Tether’s Q2 quarterly report, Tether ranks 18th among nations in terms of U.S. Treasury bond holdings.

2. Redemption Fees: Transaction Fees as a Source of Profit

According to Tether’s official website, users redeeming U.S. dollars must meet requirements such as “a minimum amount of $100,000 and a fee of 0.1% per transaction,” with each operation costing $1,000 or 0.1% (whichever is greater). Additionally, users creating an account directly on Tether’s official website must pay a $150 verification fee, which serves as a non-refundable deposit. It must be said that the “stability” of the stablecoin business is reflected not only in the 1:1 peg between the token and the U.S. dollar but also in the relative stability of its profit sources—remaining an irrefutable truth in the crypto asset industry: “Transaction fees are the optimal business model.”

3. Investment Returns: A Generous and Aggressive “Patron”

In addition to the aforementioned business revenues, as an enterprise with an annual profit scale in the billions of dollars, Tether is also an investment “patron” that “frequently makes moves.”

Tether CEO Paolo Ardoino previously stated in an interview, “Tether is well-capitalized and is currently entering unfamiliar new fields such as artificial intelligence, with plans to challenge Microsoft, Google, and Amazon. The company has already acquired a majority stake in the neural implant technology startup Blackrock Neurotech and invested in the data center operator Northern Data Group, whose infrastructure is used to train AI models.”

It is worth mentioning that although these two investments by Tether have not yet yielded returns, its “intermediaries” have already reaped substantial profits. For details, please refer to the article “Behind Tether’s $1.5 Billion Spending Spree, ‘Intermediaries’ Profit Handsomely” by The Wall Street Journal, which mentions that Christian Angermayer, a tech investor and entrepreneur commissioned by Tether to manage investments, invested approximately $1.5 billion in two companies in which he holds shares, and he also earned considerable commissions from the transactions.

Moreover, Tether’s investment portfolio is not limited to popular tech sectors like AI. Previously, it invested $100 million in Adecoagro, a Latin American agricultural giant. Prior to that, Tether had expanded its business into green energy, Bitcoin mining, artificial intelligence, and educational programs. For instance, it collaborated with the digital payment platform Rezo Money to promote blockchain education in Guinea, with corresponding educational initiatives in regions such as Thailand and Indonesia.

In the crypto asset sector, its most recent move was a $1.5 million strategic investment in Sorted Wallet, a platform aimed at promoting financial inclusion in Africa and South Asia. It is evident that Tether, as a “pioneer in crypto asset user education,” pays significant attention to “potential markets” outside of Europe and the United States.

4. Other Income

Returns from gold reserves and investment gains from crypto assets.

Furthermore, according to information on its official website, Tether’s reserve assets include precious metals such as gold and crypto assets including Bitcoin, which can provide certain asset returns and income to some extent. It is noteworthy that the current breakdown of reserve assets has improved significantly compared to the initial breakdown released in March 2021, indirectly reflecting Tether’s transformation in asset reserves in recent years:

The breakdown of Tether’s reserve assets as of March 31, 2021, was as follows:

75.85%: Cash and cash equivalents, other short-term deposits, commercial paper

12.55%: Secured loans

9.96%: Corporate bonds, funds, precious metals

1.64%: Others (including digital tokens)

Information from Tether’s Latest Reserve Report

It can be said that,Tether, holding the issuance rights to USDT, despite facing regulatory pressure from various countries and regions, can be regarded as the “‘Federal Reserve’ of the crypto asset world” without exaggeration, given its current influence and predominant market position.

Tether’s Future Path: Becoming the Super Hegemon in a “One Superpower, Many Strong Powers” Landscape

Of course, the strong money-making capability of the stablecoin business has naturally attracted significant attention from numerous institutions and platforms. Besides Circle, another stablecoin issuer closely following with its USDC, there are currently many stablecoin products in the market.

1. Overview of Stablecoin Landscape Classification

According to information mentioned in the article “Overview of Stablecoin Market Products and Their Features” previously published by Messari researcher Addy, the stablecoin landscape can currently be roughly divided into dominant players (i.e., USDT and USDC), centralized alternatives, Treasury-backed stablecoins, decentralized stablecoins, lending-based stablecoins, and newly designed stablecoins including DYAD.

Original Material

2. Competition Between New and Old Rivals

With the successive approval of Bitcoin spot ETFs and Ethereum spot ETFs this year, the compliance and mainstreaming process of the crypto asset industry has reached a milestone. As an important infrastructure product, stablecoins have also attracted increasing participation from both new and old players.

MakerDAO has gradually converted DAI into USDS, while PYUSD, supported by PayPal, has flourished on both the Solana and Ethereum networks. On another front, established platforms such as Robinhood and Revolut have also entered the fray. Although Robinhood subsequently denied speculation about the company entering the stablecoin market and confirmed that Robinhood (HOOD)in the short termhas no plan to launch its own stablecoin. Johann Kerbrat, Vice President and General Manager of Robinhood Crypto, stated, “Currently, we have no immediate plans to launch a stablecoin. Rumors are always interesting, but we haven’t really spent time on this.” According to sources, Robinhood is “exploring” a stablecoin, but specific details have not yet been determined.

Top 16 Stablecoins on DefiLlama

3. The Long Road to Compliance

Currently, most of Tether’s funds are managed by the financial services company Cantor Fitzgerald, whose CEO, Howard Lutnick, regularly provides guarantees for the stablecoin issuer. Additionally, like its competitors, Tether undergoes identical audit procedures conducted by large accounting firms, currently partnering with the independent third-party accounting firm BDO Italia.

Nevertheless, Tether still faces pressure from regulatory forces, including the “Lummis-Gillibrand Payment Stablecoin Act” proposed by U.S. Senators in April of this year (Note by Odaily Planet Daily: This bill intends to impose strict bank-like regulations on stablecoins with an issuance volume exceeding $1 billion and encourage more banks to participate in the stablecoin market), as well as the newly introduced “MiCA” regulation in the European Union in June of this year(Note by Odaily Planet Daily: This regulation prohibits stablecoins from conducting more than 1 million payment transactions or exceeding $215 million in payment transactions per day. It is worth noting that stablecoin issuer Circle subsequently obtained permission under this regulation to sell its two major stablecoins, USDC and EURC, within Europe)and other regulatory pressures.

In summary, USDT and Tether will need to make considerable efforts to maintain their predominant position in the stablecoin sector amidst future market competition.

Conclusion: Stablecoins May Be the Optimal “real-world assets (RWA) Product”

According to Julio Moreno, Research Director at CryptoQuant, the rise in stablecoin market capitalization over the past few months may have contributed to the potential upward trend of Bitcoin and other major crypto assets; the growing market capitalization of stablecoins is a key factor driving up crypto asset prices, as they provide liquidity to the crypto market.Currently, USDT reserves on crypto asset exchanges have also reached a historical high of $22.5 billion. As mentioned, “Stablecoins are like the blood of the crypto asset market,” and there is a high correlation between Bitcoin prices in September this year and the net inflow of stablecoins into exchanges.

To some extent, the net inflow of stablecoins into exchanges can serve as one of the indicators for predicting Bitcoin prices. As the crypto market fluctuates with global political and economic situations, stablecoins, as one of the crypto assets most deeply linked to real-world assets and crypto assets, undoubtedly play a certain “barometer” role.

Exchange USDT Reserve Levels

On the other hand, stablecoins represented by USDT, which are pegged 1:1 to the U.S. dollar, can perhaps be regarded as the “optimal real-world assets (RWA) product.” Of course, stablecoins issued by centralized institutions still face a series of issues, such as de-pegging risks, centralized freezing measures, and risks related to money laundering in gray and black markets. Regarding this point, Bluechip, an independent non-profit stablecoin rating agency established in July 2023, regularly rates stablecoins across six dimensions: stability, management, technical implementation, decentralization, governance, and external factors, facilitating a more comprehensive understanding and risk prevention for the market regarding stablecoins.

Regarding future development directions, some market participants are concerned about whether Tether will subsequently launch its own stablecoin blockchain network. Tether CEO Paolo Ardoino previously stated in an interview, “Although the company is strong in technology, blockchains may become commodities in the future, so launching our own blockchain may not be the right choice. Tether maintains a ‘neutral’ stance towards blockchains.For us, blockchain is merely a transmission layer.。”

As a “blood type” of the “crypto blood,” whether USDT can connect to more “economic organs” in the future remains to be seen over time.

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*This article represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For legal consultation, please contact customer service: MankunLawFirm.