Cryptodollar

In 2023, there is a high demand for USD liquidity globally from companies that do not have access to the US financial market. Countries need USD to service government debt and trade. However, the United States restricts these flows in order to have leverage. Cryptocurrencies have opened up a new, convenient and cheap way for the world to receive and transfer USD. In 2015, Omni Foundation (later Tether Limited) issued a token tied to the price of the dollar. Since then, the capitalization of USDT has grown from $950 thousand to $83 billion. In the article, readers will learn what crypto-dollar is for, how to get it, where to store it and how to exchange it for national currencies. In 2023, USDT operates in at least 10 blockchains. The most popular tokens are ERC-20, TRC-20, BEP-20.

Development of USDT

According to the theory of Brent Johnson of Santiago Capital, USD is the strongest currency in the world. Therefore, liquidity flows from other central banks are absorbed by the US economy. The demand for the dollar by nations is driven by a number of factors:

• The Fed offers a small yield on Treasury bills (1.5-2.5%). This is compensated by their high reliability (credit rating is close to the maximum). Investors are 100% confident in the return of funds and willingly invest free money in Treasury bonds.
• The U.S. economy is stronger than the vast majority of states. You can see this if you compare the chart of the S&P 500 with other indices – over the last 30 years it has been steadily growing at 5-7% per year and outpacing inflation.
• Most assets in the world trade against the dollar. Investors first need to buy USD to invest. This increases demand for the US currency.
• A large part of the world’s debt is denominated in USD. This amount is 4 times the amount of government borrowing in Euros and 24 times the amount of government borrowing in RMB. The need to convert funds to service debt creates a huge demand for USD.

Shadow banking system

The term means the provision of financial services bypassing official channels. In this case, the activity is not necessarily illegal. The term “shadow” characterizes low transparency of operations. For example, entities issue loans against the pledge of securities. At the same time, they are not obliged to comply with the Federal Reserve’s regulations on capital liquidity, which means that they can use greater leverage than traditional financial institutions.

It is difficult to estimate the exact size of the shadow banking sector. According to the US Financial Stability Board, the upper limit exceeds $100 trillion. This indicates a high demand for dollar liquidity.

Another source of loans is the repurchase market (repo – Repurchase Agreement). Commercial banks can take short-term loans on the security of liquid securities. Repo is a cheaper and more convenient way to obtain dollars. In 2019, the Fed was forced to intervene in the market because of the imbalance between supply and demand. The repo rate rose to 8% because of the shortage of cash from banks. Therefore, the Fed started lending $500 billion per day in the repo market. The gap between supply and demand was reduced.

Dollar strength

China is deliberately weakening its currency to make its products more attractive in the foreign market. By analogy, it may seem that a strong dollar is disadvantageous for the US. However, it has advantages:

1

ByBit

5020 $
bonus for new users!

9.8

VISIT Read Review

ByBit provides convenient and safe conditions for cryptocurrency trading, offers low commissions, high level of liquidity and modern tools for market analysis. It supports spot and leveraged trading, and helps beginners and professional traders with an intuitive interface and tutorials.

2

Binance

Earn a 100 $ bonus

for new users!

9.5

VISIT Read Review

The largest crypto exchange where you can quickly and safely start your journey in the world of cryptocurrencies. The platform offers hundreds of popular assets, low commissions and advanced tools for trading and investing. Easy registration, high speed of transactions and reliable protection of funds make Binance a great choice for traders of any level!

• The US can issue debt receipts (cheaper compared to other countries). USD is the only currency that is accepted in exchange for treasury bills.
• Dollar liquidity is used as leverage. Without a reserve currency, governments lose access to world trade.
• Citizens of countries with high inflation tend to convert local money into USD.

What is USDT

In the early days of cryptoassets, it became clear that the market needed an equivalent pegged to a hard currency. A dollar-backed coin allows investors to preserve funds during times of high volatility. One of the first stablecoins was offered by Omni Foundation in 2015 – Realcoin. In 2018, the founders rebranded and changed the name to Tether Limited, the asset was renamed United States Dollar Tether (USDT). In 2023, it is the most liquid stablecoin.

In the global ranking, Tether is the 3rd largest in terms of market capitalization with a market cap of $83.3 billion.

How it works

USDT is issued as a token in Ethereum, TRON, Binance Smart Chain, Solana, Optimism, and other networks. When Tether Limited receives money from individuals or companies, it issues a corresponding number of digital units. When redeemed, the tokens are burned and the dollars are returned. USDT can be exchanged between networks on exchanges and through bridges. In the second case, the token is issued in one blockchain and burned in another.

Risks

Analysts are concerned about the lack of audits by independent companies. Tether Limited publishes consolidated reserve reports, which do not disclose the exact list of banks with the amounts. Some experts fear that this may indicate insufficient collateral. It is likely that some funds are deposited in dubious institutions at high interest rates or none at all. If the problem becomes widely known, it could lead to panic and a decoupling of the coin’s price from the dollar.

The possibility of mining

USDT is a typical token issued by a blockchain standard (ERC-20, TRC-20 and others). Only developers can emit the asset, only developers can confirm transactions – network validators. As a reward, they receive some native cryptocurrency – ETH, TRX, BNB. USDT cannot be mined.

Prospects

Cryptodollars have significant potential – they can be used to make cross-border transfers quickly and cheaply without the risk of exchange rate changes relative to the original USD. Traders and investors use stablecoin to wait out temporary price volatility in the market.

However, crypto dollars pose a risk to the global economy due to the lack of regulation. In 2023, many nations are developing CBDCs (central bank digital currencies). Governments have the right to ban or restrict the use of USDT.

The prospects of USDT depend on whether developers can solve the problems associated with the legal use of tokens by businesses and other entities.

What crypto-dollar is for

By issuing the first stablecoin, Tether Limited committed to exchanging it at a 1-to-1 exchange rate for real money. In 2015, USDT opened up new opportunities:

• Toexchanges – to bypass KYC requirements when funding customer accounts in fiat.
• Investors – to avoid paying taxes when exchanging cryptocurrencies for national money.

By the end of 2016, the loopholes were closed, but the token had already gained popularity. In 2017-2018, Chinese OTC services bought several hundred million tokens a day. Starting in 2018, USDT issuance began to grow exponentially. By July 2023, the supply reached 83 billion coins. The sphere of application of USDT has gone beyond crypto exchanges. Today it is used for such purposes as:

• Top-ups on forex platforms as an alternative to bank cards.
• International transfers.
• Capital storage.
• Risk avoidance during the correction period in the crypto market.
• Payment for goods and services.
• Investments in DeFi projects.

What the crypto-dollar is actually secured by

The obligation to exchange USDT into real dollars and back is performed by Tether Limited. To use the service, you need to pass verification. The minimum exchange amount is $100 thousand.

At first it was implied that the company should keep fiat currency as collateral. In 2019, the rules were amended: up to 26% of the amount is allowed to be held in other assets (loans, promissory notes).

Data on collateral

According to the rules, the company issues tokens only in exchange for dollars. However, it was not possible to verify this due to the lack of audit reports. In 2016, it turned out that Tether Limited had a $850 million hole in its budget (50% of collateral at the time). US customers sued the company. As a result, Tether Limited committed to providing quarterly asset reports. According to a recent document, the reserves are allocated as follows:

• Short-term US government bills (Treasury Bills).
• Bank deposits and money market ETFs.
• Short-term corporate bonds (up to a year).
• Other – loans, notes, long-term debt, precious metals investments, and other assets.

Tether Limited reports do not contain precise information with which to verify the existence of reserves. The names of banks in the documents are blacked out or not listed. Investors rightly fear that the reserves will not be able to sell quickly if necessary.

Nevertheless, the company is honoring its commitments. Non-disclosure of specific data can be an advantage.

For example, in March 2023, USDT’s main competitor, USDC, lost its peg to the dollar due to the bankruptcy of Silicon Valley Bank. Holders of the asset knew that the company had kept a significant amount of reserves at the bank. This triggered panic in the market.

How to keep the exchange rate 1 to 1

USDT token is traded on exchanges, so quotes depend on the balance of supply and demand. During the day, deviations of up to 1% are allowed. However, on the issuer’s website you can always exchange USDT into dollars at a rate of 1 to 1. This is used by arbitrageurs. They can buy the asset on the exchange for $0.99 and sell it on the site for $1, receiving 1% risk-free yield. Such rate deviations are rarely observed. Therefore, we can conclude that the mechanism works reliably enough.

Varieties of Tether

At first, the developers of USDT released tokens on the Omni blockchain, which links them with bitcoin blocks. At the time of the launch of the stablcoin, this was the only option, but later more promising networks emerged. In 2023, Omni is virtually unused due to low throughput (it takes 3 bitcoin chain confirmations to process a transaction).

Tether Limited has issued USDT in Ethereum, TRON, Solana, Binance Smart Chain and more than 10 other blockchains.

On ERC-20.

USDT on the Ethereum network appeared on the Ethereum network in 2019. Users were able to not only accept and send assets, but also leverage them in DeFi applications. In late 2019, USDTs were launched in TRON and EOS blockchains for technological diversification. However, they only started to be widely used in 2021. Conservative investors trust the Ethereum blockchain more and store assets in USDT ERC-20, despite higher fees.

On TRC-20

In 2023, USDT is backed by about 20 chains, but TRON is the most popular. The TRC-20 standard proved itself back in 2020 – in a growing market. Back then, Ethereum commissions were as high as $50 and TRON commissions were as low as $1.

In 2023, USDT TRC-20 is included in the listings of most exchanges and online outlets. Users can pay with tokens for goods online on a par with bitcoins and Tether ERC-20.

How to buy USDT stablecoin

From a technical point of view, the coin does not differ from other cryptocurrencies. It can be bought on exchanges, P2P-platforms, in exchangers. In some Russian cities USDT is exchanged in ATMs for cash. Multi-currency wallets (Trust Wallet, Guarda Wallet) also support payment gateways to buy USDT. Most services work with ERC-20, TRC-20 and BEP-20 tokens.