How Tether Will Depeg And Collapse
The Final Chapter And The Eventual Demise Of $USDT
In recent years, centralized stablecoin Tether — USDT evolved into a dominant force in cryptocurrency trading volumes.
Exchanges relied on USDT and allowed it to grow in influence and achieve a phenomenal 80 Billion dollar market cap at its peak.
After an alleged $20 billion of redeems materialized, Tether sustains an approximate $65 Billion market cap.
Many journalists have often discussed Tether, and even Vitalik Buterin called it once a ticking time bomb. Digital artist Mike Winkelmann (a.k.a. Beeple) also labeled one of his words as Tether, having illustrated a ticking time bomb.
Tether demands trust, allowing permissioned transactions under centralized smart contracts with administrative control.
Centralization is the point of failure, and the basis for why Tether will not last. Financial authorities allow a centralized version of the dollar to operate for their reasons, although there is one pivotal moment Tether will lose all leverage.
A Single Admin Controls All USDT
Tether is the third largest cryptocurrency in market cap, with 65 Billion USDT tokens in circulation, each backed 1:1 to the dollar. Tether suggests it always upholds the peg with a basket of assets, which in 2021 included $40 Billion worth of “commercial paper”. Although most researchers disagree with this, the backing of USDT is actually not the top concern.
As a centralized entity, Tether has an on/off switch.
The smart contract allows a single admin to freeze funds or blacklist addresses on any blockchain Tether operates.
Smart contracts give absolute control to their developer to create them without restrictions. With USDT and USDC, smart contracts allow the admins to control funds by freezing them.
Why is this a drawback some still attached to the legacy financial establishment will wonder?
Control works against the values of decentralized cryptocurrencies. It is the antithesis of financial/economic freedom.
However, control is one issue. We examine below how control will affect USDT negatively.
Frozen Tether ($435 Million)
“Tether works closely with law enforcement worldwide to assist in investigations, and has to date assisted in freezing over 360 million in assets, 101 million of which have either been reissued or are scheduled to be reissued.”, a spokesperson for Tether told Cointelegraph. (Cointelegraph, Oct. 11th, 2022)
The total frozen amount is higher than $360 million, as Dune Analytics estimates Tether has already frozen $435 million USDT.
According to the statement above by an unnamed Tether exec (Cointelegraph report), Tether will keep $101 million reserves for themselves and re-use these funds to mint new tokens.
Tether supposedly backs USDT 1:1 to the dollar, using various collateral.
Tether freezes USDT in addresses and keeps the funds to use the collateral to fill gaps.
While we would expect the frozen USDT to be seized with authorities requesting Tether to mint in a new address, this doesn’t seem to be the case, after all!
Tether can mint new USDT by freezing old tokens at will without a redemption procedure!
The question here is:
Why does Tether get to keep the “loot”?
If this statement stands correct, this is actually a gift to Tether, sustaining growth and enriching its operatives. With fake USDT using the same reserves as the frozen tokens.
In case authorities request Tether to freeze addresses, it should also:
- Either confiscate the funds and sell the USDT for USD, or
- Ask Tether not to use the reserves backing the frozen USDT.
According to Dune analytics, Tether blocked 215 addresses so far in 2022 and 357 in 2021.
Tether has frozen hundreds millions of USDT throughout the years. Here is a long list of publications about Tether freezing funds:
- Tether Freezes Over $46M of FTX’s USDT, November 2022
- Tether stablecoin issuer freezes 8.2M USDT on Ethereum: Data October 2022
- Tether Freezes $150M Worth of USDT, Blacklists 3 Addresses, January 2022
- Poly Network Exploit: Tether released the final $33 million, August 2021
- Tether Freezes $1.7M in USDT Stolen in Yearn Finance Exploit, Febriary 2021
- Bitfinex and Tether Freeze $33M USDT from KuCoin Hack, September 2020
Besides freezing USDT and blacklisting addresses, Tether is able to burn or issue new tokens.
When Will USDT Collapse?
Tether is a giant bait used by financial law enforcement agencies tracking criminal organizations, money laundering, and tax evasion.
When all the above participants realize the danger posed by Tether, USDT will have no use case for financial authorities.
The collapse will begin with subpoenas and court orders. Tether will depeg quickly, since “trust” will be gone.
Tether serves no other purpose for the US government besides tracking down unlawful money transfers.
When this use case ceases, Tether will receive orders to halt operations.
For the establishment, better alternatives of compliant stablecoins exist to keep control of the cryptocurrency market. However, they are not safer alternatives.
The FED will push testing and adoption of its new CBDC faster than anyone thought. Tether acts as a stepping stone for CBDCs, providing valuable experience to FED regulators, developers, and economists.
When the US CBDC (or even in Europe) launches, expect the crackdown on USDT to begin.
The e-gold Example
e-gold was a centralized digital currency denominated in grams of gold or silver, offering instant transactions while it operated from 1996 to 2009.
At its height in 2009, the service was supporting five million accounts.
This digital currency experienced rapid growth since 2000 and caught the attention of mainstream news, merchants, internet users, but also online criminals, and authorities.
e-gold today is perceived as the precursor to smart contracts because of the immediate settlement capabilities of the system.
However, e-gold wasn’t a successful endeavor for its founders, with some of them getting into vast debt as the 2008 financial crisis struck.
The administrators halted operations at the court’s request, pleading guilty to charges of money laundering and operating an unlicensed money business.
The e-gold network (central server) kept logs of all accounts and transactions permanently. This approach allowed police to track down multiple criminals using the service.
Just as e-gold served well to locate various crime syndicates, Tether operates a similar centralized system on top of blockchain networks (Ethereum, Tron, BSC) with a public ledger and a central authority (Tether admins).
Law enforcement identifies accounts using Tether and connects transactions to identities. Unlike every permissionless cryptocurrency, Tether operates with a central authority in control, giving the option to freeze and confiscate funds.
While it is useful for authorities today, they will find better and more compliant methods soon with CBDCs.
Tether controls today more than 50% of trading volumes.
Thus more than 50% of cryptocurrency exchange trades are also in the control of law enforcement.
Tether will collapse when the US financial authorities pull the switch, as they did with e-gold, and any other centralized digital money attempts in the past.
Why DAI Is Not An Alternative (Yet)
Any centralized stablecoin will not survive in the long run. A centralized authority in control of supply with the ability to censor transactions is vulnerable.
Satoshi created Bitcoin with decentralization at its essence, comprehending any other approach was going to fail.
We can regard experimental decentralized stablecoins like DAI as more resilient, however, they also carry issues their communities might want to fix.
Backing a decentralized stablecoin with centralized stablecoins doesn’t seem to make sense.
DAI includes a dangerous level of USDC reserves.
USDC is another centralized stablecoin similar to USDT. The operator of this stablecoin is Center, a joint partnership between Circle and Coinbase.
DAI upholds a permissionless nature, although a single point of failure lies in the USDC reserves. If USDC fails, so will DAI.
In Conclusion
Account-based networks like Ethereum and its clones are easier to track than UTXO-based blockchain networks (BTC, Litecoin, Bitcoin Cash). Tether is utilizing these networks to deploy smart contracts and mint USDT.
USDT is centralized, permissioned, and censorable.
These abilities allow financial authorities to interact with the market and proceed with requests to freeze USDT.
The censorability of Tether contradicts the precise reasons Satoshi created Bitcoin. It is amusing watching Bitcoin maximalists promoting centralized stablecoins, which present a stepping stone for the mass deployment of CBDCs.
e-gold is only one example of a failed centralized digital currency. Tether and other stablecoins will meet a similar fate.
Cover Picture by on Pixabay (background)
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