Article: flowie, ChainCatcher

Editor: Marco, ChainCatcher

Last week, Tether released its Q2 2024 financial report. Tether's Q2 net operating profit reached 1.3 billion US dollars, and its profit for the first half of 2024 was as high as 5.2 billion US dollars, reaching a historical high.

With a half-year profit of 5.2 billion US dollars, equivalent to nearly 30 million US dollars in daily earnings, many listed companies are far behind. However, the seemingly lucrative Tether may not be as impressive as the financial report presents.

On June 31, the new "MiCA" regulation enacted by the European Union came into effect, which means that Tether's stablecoin is officially facing mass delisting in Europe. Cryptocurrency exchanges such as Binance, OKX, Uphold, and Bitstamp have announced the delisting of almost all USDT trading pairs in the European region due to this regulation.

Meanwhile, Tether's competitor, Circle, has obtained legal permission under "MiCA" to sell its two stablecoins, USDC and EURC, within the European region.

Europe is the largest region for cryptocurrency adoption. According to a recent study published by CoinWire, Europe accounts for 37.32% of the global cryptocurrency trading volume.

Circle is seizing a significant market share from Tether. According to CCData's report, after the European regulations took effect, the trading volume of USDC trading pairs on centralized exchanges increased by over 48%.

Since its establishment in 2014, Tether, which has experienced multiple cryptocurrency scandals and regulatory FUD, has now grown into a behemoth. Will Tether's future be "too big to fail" or will it still face the risk of "being sidelined"?

USDC Trading Volume Repeatedly Surpasses USDT by a Large Margin

As the bull market begins, the market capitalization of stablecoins continues to grow. According to the latest report from CCData Research, as of the end of July, stablecoins have been rising for 10 consecutive months.

USDT, as the largest stablecoin by market capitalization, has also been growing and dominates nearly 70% of stablecoin trading. However, an undeniable signal is that USDT's biggest competitor, USDC, has seen significant increases in market capitalization and trading volume since surpassing USDT in monthly trading volume for the first time in December 2023. Especially in terms of trading volume, USDC has repeatedly surpassed USDT by a large margin in 2024.

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

According to Kaiko's report analysis, the increasing popularity of USDC may be due to the growing preference for regulated stablecoins among users.

The relative compliance and regulatory nature of USDC also make it the preferred choice for large institutional clients entering the cryptocurrency field.

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

After the European regulations took effect in July, the trading volume of USDC trading pairs surged again. CCData's data shows that after centralized exchanges delisted USDT trading pairs in Europe, the trading volume of USDC trading pairs increased by 48.1% to reach 135 billion US dollars, reaching a historical high.

In addition to the growth opportunities on centralized exchanges, the growth of USDC 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 Coinbase's Base public chain, USDC accounts for 91% of the total stablecoin supply. Base does not support USDT. Data from June 18 shows that the supply of USDC on the Base chain has grown by over 1000% in nearly 90 days.

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

Bankless stated that the reason USDC dominates on Solana is due to Circle and the Solana Foundation's strategies to incentivize developers and promote the integration of trading platforms.

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

After the European Crisis, Compliance Issues Remain a Potential Time Bomb?

The view that Tether has been FUDed due to regulatory compliance issues has never ceased.

In addition to the European "MiCA" regulation, the "Lummis-Gillibrand Payment Stablecoin Act" proposed by U.S. senators in April this year has also been pointed out by multiple institutions as a threat to Tether.

The "Lummis-Gillibrand Payment Stablecoin Act" requires stablecoins with an issuance of over 1 billion US dollars to be subject to the same strict regulations as banks and encourages more banks to participate in the stablecoin market.

Rating agency Standard & Poor's Global pointed out that most US dollar stablecoin issuers, including the highest market share holder USDT, are not bound by U.S. regulations. However, if the bill is passed, it may prompt more banks to enter the stablecoin market and affect Tether's dominant position.

A recent report from JPMorgan also indicated that cryptocurrency regulatory measures in the United States have strengthened in recent months. With the upcoming presidential election, the Payment Stablecoin Act is most likely to be passed, which will benefit compliant U.S. stablecoins and threaten Tether's dominant position.

A report from Deutsche Bank also raised questions about the operational stability and transparency of Tether.

Although Tether's trading activities mainly occur in emerging markets outside the United States, the United States remains one of the most important markets in the cryptocurrency field. If Tether does not respond, it may miss out on this market.

Whether based on an understanding of the trend towards regulatory compliance or on competitive considerations, several cryptocurrency founders 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 former Binance CEO Zhao Changpeng (CZ), the next regulatory target of the U.S. SEC is Tether.

Brad was later countered by Tether's CEO Paulo Ardoino, and the two engaged in a "war of words" for several days.

Ripple also announced this year the launch of a stablecoin pegged to the U.S. dollar. Paulo believes that Ripple, as a competitor, is maliciously attacking Tether.

However, Brad insisted that it was not an intentional attack. He believes that the U.S. government has clearly expressed its desire to strengthen control over stablecoin issuers backed by the U.S. dollar, and therefore, Tether, as the largest participant, is on their radar.

In March this year, after Arthur Hayes' family office Maelstrom invested in the new stablecoin protocol Ethena, Arthur Hayes also wrote a lengthy blog post discussing why the Federal Reserve, the U.S. Treasury, and politically connected large U.S. banks want to destroy Tether.

Arthur Hayes believes that Tether's full reserve banking model runs counter to the Federal Reserve's goal of reducing the amount of bank reserves to suppress inflation.

And 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 a risk to the U.S. Treasury market.

In addition, Tether's profitability is attracting competition from banks.

An analyst at Maelstrom created a speculative balance sheet and income statement for Tether, showing that Tether's revenue per employee is $62 million. It is difficult for the eight "too big to fail" banks, represented by JPMorgan, to match Tether's profitability.

It is expected that within the next year, important cryptocurrency regions such as Hong Kong, Singapore, Japan, the UK, and the UAE, in addition to the United States, will gradually introduce comprehensive stablecoin regulatory rules.

After global regulatory regulations are gradually implemented, it may be difficult to determine whether Tether is really at risk of being sidelined.

Some opinions believe that the U.S. government has no reason to cause trouble for Tether.

Analyst Checkɱate from Glassnode stated that the USDT issued by Tether is essentially equivalent to the U.S. CBDC. He believes that Tether's existence has been tacitly approved by the U.S. government. "USDT absorbs U.S. government bonds, thereby supporting the U.S. Treasury."

In dealing with government regulations, Tether CEO Paulo also stated in response to Brad that Tether has been cooperating with law enforcement agencies in different countries.

In the past three years, 339 requests have been blocked, with 158 of them being in cooperation with U.S. law enforcement agencies.

Some opinions believe that, like the U.S. dollar, the misuse and the relationship with the issuing institution are not significant. As long as Tether cooperates with law enforcement to freeze, the danger is not as high as imagined.

Regarding how to deal with the EU's delisting and potential threats in other regions, Tether currently does not have a clear and specific stance. However, Tether may be attempting to break free from unilateral U.S. control.

In June this year, Tether made a strategic investment of $18.75 million in compliance blockchain financial institution XREX Group.

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

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

The purpose of launching XAU1 is to gradually neutralize the U.S. dollar while maintaining the familiar pricing in U.S. dollars. "Because Tether is clear that the control of the money earned through U.S. bond interest is not in its own hands but in the hands of the Federal Reserve, so 80% to 85% of the money earned is used to buy gold from Swiss mints."

In addition, 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 expenses by over 150% in 2023.

The Stablecoin "Fat" Always Attracts Predators

In addition to regulatory risks, Tether also faces no shortage of challengers.

At the beginning of last year, BUSD, which had always been 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 replacement players.

Web2 payment giant PayPal launched the stablecoin PYUSD, and the stablecoin FDUSD, seen as a replacement for BUSD by Binance, also quickly emerged. In addition, old blue-chip DeFi projects such as Curve, Aave, and Frax actively launched native stablecoins; and some new forces of interest-bearing stablecoins leveraging LSD and RWA were born.

This year, as mentioned earlier, BlackRock launched the tokenized fund BUIDL, which is similar to an interest-bearing stablecoin, to a certain extent, also recognizing the profitability of stablecoins.

In addition, some innovative stablecoin protocols are still rising strongly this year. Ethena's USDe is a new type of stablecoin supported by Ethereum derivatives. Since its mainnet launch in February, in just six months, its market capitalization has exceeded $30 billion, making it the fourth-largest stablecoin after Dai.

The investment institutions behind Ethena seem like a novel. In February this year, Ethena received a $1400 million investment led by Dragonfly, Brevan Howard Digital, and Arthur Hayes' family office Maelstrom, with participation from PayPal Ventures, Franklin Templeton, Avon Ventures, Binance Labs, Deribit, Gemini, and Kraken, reaching a valuation of $3 billion. In July last year, Ethena also received a $6.5 million investment 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, there is still a huge potential for adjustment in the stablecoin landscape, providing opportunities for disruption in terms of compliance, centralization risks, and how returns are distributed to users.

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