Trapped by stability: The Tether stablecoin dilemma
The issue of Tethers and their effect on Bitcoin and the cryptocurrency market has been a recurring theme, or perhaps more accurately, a recurring nightmare over the past couple years. It is, admittedly, a problematic situation that is rife with fear, uncertainty, and doubt.
Let’s consider a quick and simplified summary of how Tethers USDT works (I admit, it’s actually quite a bit more complicated, but hopefully this will suffice). In a nutshell, Tethers are issued first under the USDT ticker on the Bitfinex exchange, where they can be bought, withdrawn, and redistributed throughout the larger exchange ecosystem. Once spread throughout exchanges around the world, many of which do not operate in fiat currencies and therefore need fiat-equivalent stablecoins, USDT acts as a volume-enhancing currency, adding liquidity and an ability to move currencies and value around globally. Without USDT, trade between exchanges and traders in various regions around the world would be considerably slower and much lower in volume comparatively.
So, it seems USDT can serve a useful purpose. But here’s where the problems begin. Historically, when a large quantity of USDT has been issued to Bitfinex, bought with fiat, and then circulated throughout the world’s exchanges, Bitcoin and the crypto market as a whole temporarily rise in value with the injection of fiat. This, in and of itself isn’t really a problem, but it points to the fact that the issuance of Tethers does, at least indirectly, have an effect on market valuations. One could argue this is perfectly natural since it is essentially an influx of fiat into crypto and should, therefore, cause a price increase. But the issuance of Tethers is not a purely free market force. It is issued by central agents who decide when to issue it, depending on when they feel it to be pertinent to do so.
An interesting situation happened on Monday, October 15 with Tethers. Strangely, following a moment of FUD that involved rumors of Binance delisting USDT, a sudden rush to sell Tethers actually caused a spike in Bitcoin value and a significant drop for the so-called stable coin — a rare and alarming occurrence. Fears about Bitfinex and Tethers experiencing issues with banking and constant anxieties about the possibility of insolvency have been stirring the pot and it only took a little bit of fabricated news about a USDT delisting to get the ball rolling.
Logically, a considerable quantity of Tethers being quickly exchanged for Bitcoin ought to cause a good jump in Bitcoin value, and a rush to trade in Tethers on Bitfinex for USD fiat could also contribute to the fall in USDT value, despite its stablecoin design. Interestingly, traders did not appear to flee from crypto into fiat, instead opting for Bitcoin as their shelter. Had the rumor turned out to be true, we could well have seen more frightened traders discarding their crypto for fiat altogether, potentially causing a massive crash.
It is ironic that a currency that was designed to rise above the centralized and manipulated nature of fiat remains, at least somewhat, at the mercy of a fiat-pegged stablecoin, and fiat in general, for that matter. This could be changing, to some extent, with the addition of a number of stablecoin alternatives, such as TrueUSD, Gemini USD, PAX, and DAI. But this growing fleet of stablecoins brings new questions.
What are the long-term implications of a large influx of stablecoin alternatives? Newer stablecoin choices do seem to offer more trustworthy solutions than USDT has provided, but the problem remains: the market as a whole still places too much emphasis and dependence on the value of crypto in comparison to fiat. Fiat, the ultimate example of a currency with completely arbitrary value, still holds sway over currency that was designed to be independent from its influence.
Will there come a time that the world thinks in satoshis instead of dollars?
It may take adoption happening in parts of the world that no longer trust their fiat currencies to bring about this change — regions like Venezuela, where one is better off buying and selling goods with Dash, Bitcoin, or other cryptocurrencies rather than hoping the paper money they have today is worth anything tomorrow. Unstable economies in countries like Turkey or developing nations on the precipice of monetary collapse could be the birthplace of a new age in global economics. Citizens could well decide to eschew the corrupt nature and mismanagement of centralized fiat for the now safer stability of currencies issued via consensus and immutably stored via distributed ledgers.
But in the meantime? There’s Tether.
We could be stuck here for a while.