Tether's 10th Anniversary: Earning nearly $30 million a day, yet still facing the risk of "exiting"?

Author: flowie, ChainCatcher

Editor: Marco, ChainCatcher

Last week, Tether released its Q2 2024 financial report. Tether's net operating profit for Q2 reached $1.3 billion, with profits for the first half of 2024 soaring to $5.2 billion, setting a record high.

A profit of $5.2 billion in six months translates to nearly $30 million a day, a figure that many publicly traded companies can only envy. However, Tether, which is making a fortune, may not be as rosy as the financial report suggests.

On June 31, the EU's newly enacted MiCA legislation came into effect, meaning Tether's stablecoin officially faces mass delisting in Europe. Cryptocurrency exchanges like Binance, OKX, Uphold, and Bitstamp have announced the delisting of almost all USDT trading pairs in the European region due to this legislation.

In contrast, competitor Circle has obtained legal permission under MiCA to sell its USDC and EURC stablecoins across Europe.

Europe is the largest region for cryptocurrency adoption. A recent study released by CoinWire shows that the cumulative cryptocurrency trading volume in Europe accounts for 37.32% of the global market.

Circle is capturing a significant market share from Tether. A report from CCData indicates that after the EU regulations took effect, the trading volume of USDC trading pairs on centralized exchanges increased by over 48%.

Since its establishment in 2014, Tether has weathered multiple crypto crises and regulatory FUD, growing into a behemoth. Will Tether's future be "too big to fail," or will it still face the risk of "exiting"?

USDC Trading Volume Frequently Surpasses USDT

As the bull market begins, the market capitalization of stablecoins continues to grow. According to the latest report from CCData Research, by the end of July, stablecoins have risen for ten consecutive months.

USDT, as the largest stablecoin by market capitalization, is also on the rise, dominating nearly 70% of stablecoin trading. However, an undeniable signal is that USDC, currently USDT's biggest competitor, has significantly increased its market capitalization and trading volume since its monthly trading volume first surpassed USDT in December 2023, especially in trading volume, where it has frequently exceeded USDT.

Data released by Visa and Allium Labs shows that on March 24, 2024, USDC's trading volume for that week was nearly five times that of USDT. On April 21, 2024, USDT's weekly trading volume shrank to $89 billion, while USDC surged to $455 billion.

According to an analysis report from Kaiko, the increasing popularity of USDC may be attributed to users increasingly adopting and preferring regulated stablecoins.

The relatively compliant and regulated nature of USDC also makes it the preferred choice for large institutional clients entering the crypto space.

This year, BlackRock launched a tokenized fund called BUIDL, which is pegged 1:1 to the US dollar, allowing holders to effectively obtain a "security" similar to an interest-bearing stablecoin. To ensure that investors can redeem or purchase stablecoins 24/7/365, BlackRock chose to partner with Circle to establish a USDC liquidity pool controlled by a smart contract for investors.

After the EU regulations took effect in July, USDC's trading volume surged again. CCData shows that after centralized exchanges delisted USDT trading pairs in Europe, the trading volume of USDC trading pairs increased by 48.1%, reaching $135 billion, a record high.

In addition to seizing growth opportunities on centralized exchanges, USDC's growth on some active public chains this year is also noteworthy.

In August last year, Circle received investment and support from Coinbase, which announced the launch of USDC on six new chains.

On the Base public chain, which is part of the Coinbase ecosystem, USDC accounts for 91% of the total stablecoin supply. Base does not support USDT. Data from June 18 shows that USDC's supply on the Base chain increased by over 1000% in nearly 90 days.

On the Solana chain, Bankless shared a set of data on the X platform, stating that "USDC accounts for about 70% of the total stablecoin supply on the Solana chain, and this week, the trading volume of USDC to USDT on Solana was 19:1."

Bankless attributes USDC's dominance on Solana to the strategies employed by Circle and the Solana Foundation to incentivize developers and promote trading platform integration.

For example, platforms like Solend Protocol and Superteam in the Solana ecosystem provide developer rewards in USDC, and Circle's cross-chain transfer protocol (CCTP) and Web3 service rewards on Solana are also driving USDC's growth on the Solana chain.

After the European Crisis, Is Compliance Still a Potential Bomb?

The FUD surrounding Tether due to regulatory compliance issues has never ceased.

In addition to the EU's MiCA legislation, the "Lummis-Gillibrand Payment Stablecoin Act" proposed by U.S. senators in April has also been pointed out by several institutions as a threat to Tether.

The "Lummis-Gillibrand Payment Stablecoin Act" requires stablecoins with a supply exceeding $1 billion to implement strict regulations similar to those for banks and encourages more banks to participate in the stablecoin market.

Rating agency S&P Global pointed out that most dollar stablecoin issuers, including the market leader USDT, are currently not subject to U.S. regulations. However, if the bill is ultimately enacted, it could prompt more banks to enter the stablecoin market and affect Tether's dominant position.

A recent report from JPMorgan also indicated that U.S. cryptocurrency regulatory measures have strengthened in recent months. Before the upcoming presidential election, the payment stablecoin bill is most likely to be passed, which would benefit compliant U.S. stablecoins and threaten Tether's dominance.

Deutsche Bank's report has also raised questions about Tether's operational stability and transparency.

Although Tether's trading activities mainly occur in emerging markets outside the U.S., the U.S. remains one of the most important markets in the crypto space. If Tether does not respond, it may miss out on this market.

Whether based on an understanding of regulatory compliance trends or competitive considerations, several founders of crypto companies have warned that the next regulatory hammer may fall on Tether.

In May this year, Ripple CEO Brad Garlinghouse revealed on a podcast that after the collapse of FTX and the imprisonment of former CEO SBF, as well as the recent conviction and sentencing of Binance's former CEO Changpeng Zhao (CZ), the next regulatory target of the U.S. SEC is Tether.

Brad was subsequently countered by Tether's CEO Paulo Ardoino, leading to several days of a "war of words" between the two.

Ripple also announced this year the launch of a stablecoin pegged to the U.S. dollar, which Paulo believes is a malicious attack on Tether by Ripple as a competitor.

However, Brad insists it is not a deliberate attack, arguing that the U.S. government has clearly indicated its desire to strengthen control over issuers of dollar-backed stablecoins, making Tether, as the largest participant, a focus of their attention.

In March this year, after Arthur Hayes' family office Maelstrom invested in the new stablecoin protocol Ethena, Arthur Hayes also published a lengthy article on his personal blog, discussing why the Federal Reserve, the U.S. Treasury, and large U.S. banks with political connections want to destroy Tether.

Arthur Hayes believes that Tether's full-reserve banking model contradicts the Federal Reserve's established goal of reducing the amount of bank reserves to curb inflation.

Moreover, Tether is too big. Tether is now one of the largest holders of U.S. Treasury bonds. The growth of Tether and similar stablecoins serving the cryptocurrency market poses risks to the U.S. Treasury bond market.

Additionally, Tether is too profitable, which will attract competition from banks.

A speculative balance sheet and income statement prepared by analysts at Maelstrom for Tether shows that Tether generates $62 million in revenue per employee, a figure that is difficult for the eight "too big to fail" banks represented by JPMorgan to match.

It is expected that within the next year, important crypto regions such as the U.S., Hong Kong, Singapore, Japan, the U.K., and the UAE will successively introduce comprehensive stablecoin regulatory rules.

After global regulatory frameworks gradually take shape, whether Tether truly faces the risk of exiting may be difficult to conclude for now.

Some viewpoints suggest that the U.S. government has no reason to trouble Tether.

Glassnode analyst Checkɱate stated that the USDT issued by Tether is essentially equivalent to the U.S. CBDC, and he believes that Tether's existence has tacit approval from the U.S. government. "USDT absorbs U.S. government bonds, thereby supporting U.S. finances."

In handling relationships with government regulators, Tether CEO Paulo has also stated in rebuttal to Brad that Tether has been cooperating with law enforcement agencies in different countries.

"In the past three years, we have blocked 339 requests, of which 158 were in cooperation with U.S. law enforcement agencies."

Some believe that, like the U.S. dollar, how USDT is misused and the relationship with the issuing institution is not significant; as long as Tether cooperates with law enforcement to freeze, the danger is not as high as imagined.

As for how to respond to the EU's delisting and other potential threats, Tether currently has no clear specific statement. However, Tether may be attempting to break free from unilateral control by the U.S.

In June this year, Tether strategically invested $18.75 million in the compliant blockchain financial institution XREX Group.

XREX Group founder Huang Yaowen revealed in a media interview that after this investment, Tether and XREX will launch XAU1 in collaboration with the Unitas Foundation.

XAU1 is a unit coin backed by Tether Gold (Tether Gold, code XAUt) and pegged to the value of the U.S. dollar, providing a robust financial alternative for stablecoin users and serving as a hedge against inflation.

The purpose of launching XAU1 is to gradually neutralize the dollar while maintaining the familiar dollar-denominated pricing, free from unilateral control by the U.S. "Because Tether knows that the money earned through U.S. Treasury bond interest is controlled by the Federal Reserve, not by itself, thus 80% to 85% of the money earned is used to buy gold from Swiss mints."

Additionally, Tether is also seeking business growth beyond stablecoins, expanding into areas such as Bitcoin mining, AI, and education.

Perhaps in response to regulatory pressure, Tether is also increasing its lobbying expenses. Data from the non-profit organization OpenSecrets shows that Tether's parent company iFinex increased its lobbying expenditure by over 150% in 2023.

The "Fat Meat" of Stablecoins Never Lacks Predators

In addition to regulatory risks, Tether also faces challengers.

At the beginning of last year, BUSD, which had consistently held the position of the third-largest stablecoin, exited the historical stage overnight due to regulatory pressure from the U.S. SEC. However, the stablecoin market quickly welcomed several substitutes.

Web2 payment giant PayPal launched the stablecoin PYUSD, and FDUSD, seen as a replacement for BUSD by Binance, also quickly emerged. Additionally, established DeFi players like Curve, Aave, and Frax are actively launching native stablecoins; new forces in interest-bearing stablecoins leveraging LSD and RWA have also emerged.

This year, as previously mentioned, BlackRock launched the tokenized fund BUIDL, which is similar to an interest-bearing stablecoin, partly capitalizing on the lucrative stablecoin business.

Moreover, some innovative stablecoin protocols are still rising strongly this year. Ethena's USDe is a new type of stablecoin supported by Ethereum derivatives, which has surpassed $3 billion in market capitalization within six months since its mainnet launch in February, becoming the fourth-largest stablecoin after Dai.

The investment institutions behind Ethena resemble a novel. In February this year, Ethena secured a $14 million financing round co-led by Dragonfly, Brevan Howard Digital, and the family office of BitMEX founder Arthur Hayes, with participation from PayPal Ventures, Franklin Templeton, Avon Ventures, Binance Labs, Deribit, Gemini, and Kraken, reaching a valuation of $300 million. In July last year, Ethena also received $6.5 million led by Dragonfly.

This may also indicate that some market players and capital believe that although Tether and Circle currently dominate most of the stablecoin market, the stablecoin landscape still has significant potential for adjustment, providing disruptive opportunities for newcomers in terms of compliance, centralization risks, and how profits are distributed to users.