The "Tether Theory" is no longer a hypothesis but a fact, and its impact is just beginning to be understood.

Written by: Shanaka Anslem Perera

Translated by: Block unicorn

I. Core Argument

The international monetary order is undergoing a fundamental reorganization, not due to deliberate actions by central banks or multilateral institutions, but rather due to the emergence of an offshore entity that most policymakers still struggle to categorize. Tether Holdings Limited (the issuer of the USDT stablecoin) has constructed a financial architecture that extends the U.S. monetary hegemony deep into the global informal economy while laying the groundwork for ultimately circumventing that hegemony.

This is not a story about cryptocurrency, but rather a story about the privatization of dollar issuance, the fragmentation of monetary sovereignty, and the emergence of a new type of systemic actor that exists in the gray area between regulated finance and borderless capital. The passage of the GENIUS Act in July 2025 solidified this transformation into a binary choice for global dollar users: either accept U.S. regulation or operate within a parallel monetary system that Washington can oversee but cannot fully control.

Its impact extends far beyond the realm of digital assets. Tether has almost accidentally constructed a concept proof of private currency issuance at a sovereign scale. The question facing policymakers, investors, and strategists is no longer whether this model is viable, but whether its success represents an expansion of U.S. financial power or the beginning of its diffusion.

II. Scale of Transformation

Tether's financial disclosures for the third quarter of 2025 show that the company has surpassed its initial positioning as a trading tool. Its consolidated total assets reached $181.2 billion, with liabilities of $174.4 billion, almost entirely composed of circulating digital tokens. To support its dollar peg, Tether holds $6.8 billion in excess reserves as an equity buffer, along with shareholder equity, bringing total capital to approximately $14.2 billion.

These figures require further interpretation. Tether holds a massive amount of U.S. Treasury securities, including $112.4 billion in direct Treasury exposure, as well as $21 billion in reverse repurchase agreements and money market funds, placing it among the top twenty holders of U.S. Treasuries globally. This holding even exceeds South Korea's official reserves. South Korea is a member of the G20, with a mature capital market and a central bank that adheres to strict international standards.

Profitability is also noteworthy. As of September, the company reported a net profit exceeding $10 billion, primarily from arbitrage between zero-yield liabilities and a portfolio yielding approximately 4.5%. Reportedly, the company has fewer than one hundred employees yet achieves such high profit margins, with per capita productivity far exceeding that of any traditional financial institution.

However, while these numbers are impressive, they obscure more significant structural changes. Tether has become the primary channel through which dollar liquidity flows to those excluded from or abandoned by the formal banking system. It is estimated that over 400 million people in emerging markets now save and transact in dollars via USDT, a figure that far exceeds the coverage of any development bank or inclusive finance program.

III. Regulatory Divergence

The GENIUS Act, signed into law on July 18, 2025, represents Washington's final response to the privatization of dollar issuance. The act establishes a comprehensive framework for so-called "licensed payment stablecoin issuers," creating an effective dual-layer system that segments the global dollar ecosystem.

Compliance requirements are deliberately set to be extremely stringent. Reserve assets must consist entirely of U.S. legal tender, custodial deposits from members of the Federal Deposit Insurance Corporation, U.S. Treasuries with maturities not exceeding 90 days, or repurchase agreements collateralized by these instruments. Customer funds must be legally isolated from the issuer's own operational activities and achieve bankruptcy isolation. Issuers must undergo scrutiny by federal regulatory agencies and maintain comprehensive anti-money laundering programs.

A close reading of these terms reveals that they explicitly negate Tether's current operational model. The company's reserve composition includes approximately $12.9 billion in precious metals, $9.9 billion in Bitcoin, $14.6 billion in secured loans, and nearly $4 billion in other investments. Under the framework of the GENIUS Act, these assets do not meet the criteria for allowable reserves. To be fully compliant, Tether would need to liquidate over $40 billion in positions, an action that could itself trigger a systemic event in the cryptocurrency market.

The provisions regarding foreign issuers in the act further complicate matters. Article 18 establishes a reciprocity mechanism allowing offshore stablecoins to gain access to the U.S. market, provided the U.S. Treasury determines that the foreign regulatory framework meets equivalent standards. Tether is registered in the British Virgin Islands, which has no regulatory framework for stablecoins, thus this pathway is effectively blocked unless unconventional diplomatic intervention occurs.

The strategic intent is evident. Washington has erected a barrier that could be termed a "digital currency border," allowing only dollar-denominated stablecoins to circulate within U.S. jurisdiction, provided these stablecoins operate as narrow banks and hold only sovereign debt instruments. The offshore dollar economy led by Tether has been legally isolated and cannot connect with U.S. financial infrastructure.

IV. Strategic Response

Tether's response to the regulatory divergence demonstrates a profound understanding of the limitations it faces. The company has not attempted to modify USDT to comply with U.S. regulations (which would undermine its economic model) but has instead adopted a parallel strategy.

The launch of USAT marks a shift in this strategy. USAT is a stablecoin specifically designed to comply with the GENIUS Act. This new tool will be issued through a U.S.-based entity, with reserves strictly held in the form of Treasuries and cash at qualified custodians. Anchorage Digital Bank, one of the few cryptocurrency financial institutions holding a federal banking charter, has been appointed to handle custody and settlement. Cantor Fitzgerald will manage the Treasury investment portfolio.

The appointment of Bo Hines as CEO of USAT is particularly significant. Hines previously served as the executive director of the President's Digital Asset Advisory Committee and played a crucial role in the legislative process of the GENIUS Act. His addition signifies Tether's alignment with Washington's regulatory vision at the institutional level and establishes a direct channel for Tether to engage with the Treasury and relevant regulatory agencies.

This dual-product structure allows Tether to pursue seemingly incompatible goals simultaneously. USAT aims to attract U.S. institutional clients and compete with Circle's USDC in the compliant market space. Meanwhile, USDT continues to expand globally, particularly in emerging markets that remain outside the reach of U.S. regulation, while maintaining its unique reserve composition to achieve higher returns.

The economic logic is evident. The profitability of USDT primarily derives from holding assets prohibited by the GENIUS Act. By separating compliant and non-compliant businesses, Tether retains its core cash flow while establishing a foothold in the U.S. regulatory market. Of course, the risk lies in regulatory actions against USDT potentially damaging the USAT brand, or the two products cannibalizing each other's user base.

V. Reserve Structure

To understand Tether's systemic importance, a detailed analysis of its balance sheet structure is necessary. The company employs a "barbell" asset allocation strategy, concentrating assets at both ends of the risk spectrum while avoiding intermediate positions.

Conservative assets include Treasuries and related exposures, totaling approximately $135 billion (including money market funds and repurchase agreements). These assets can generate reliable returns, carry very low credit risk, and provide immediate liquidity for redemption demands. In a scenario of downward pressure in the cryptocurrency market, Treasury prices typically rise as investors seek safe havens, creating a natural hedge.

Aggressive assets include precious metals, Bitcoin, secured loans, and venture capital, totaling approximately $40 billion. These positions can yield higher returns through appreciation, yield, or strategic option value, but they also come with significant volatility and liquidity risks.

The allocation to precious metals is particularly noteworthy. Tether's gold reserves have reached approximately 116 tons, placing it among the top forty gold holders globally and exceeding the official reserves of many sovereign nations. This gold reserve serves multiple functions: hedging against inflation risks from dollar depreciation, diversifying reliance on U.S. sovereign assets, and creating a store of value that cannot be frozen through the banking system.

As of September 2025, Tether's Bitcoin holdings were valued at $9.9 billion, comprising about 100,000 tokens. This allocation allows investors to benefit from appreciation in the cryptocurrency market while establishing a connection with the ecosystem that generates demand for USDT.

The secured loan portfolio amounts to $14.6 billion, and due to limited disclosure, it is the most challenging to analyze. These loans are issued to cryptocurrency-native counterparties and are collateralized by digital assets. The inherent risk lies in correlation: borrowers typically hold large amounts of cryptocurrency, meaning that when the value of collateral declines, their credit ratings also drop. This reverse risk structure mirrors the dynamics that led to the collapses of Celsius, BlockFi, and Genesis during the 2022 market cycle.

VI. Risk Equation

S&P downgraded USDT to its lowest stability rating (November 2025), focusing on the relationship between risk asset exposure and the equity buffer used to defend the USDT peg. This analytical framework is quite enlightening.

Tether's designated excess reserve of approximately $6.8 billion must absorb any declines in asset value to ensure that the USDT peg remains unaffected. Beyond this reserve, the company also holds approximately $22.8 billion in gold and Bitcoin exposure, plus $14.6 billion in secured loans that carry embedded credit risk.

Given historical volatility, a 30% drop in gold and Bitcoin prices is not unprecedented, which would result in an unrealized loss of about $6.8 billion, perfectly aligning with the size of the excess reserves. Under market pressure, a simultaneous rise in loan default rates would cause losses to exceed the buffer, technically undermining Tether's peg mechanism.

The market adjustment in November 2025 provided a real-time stress test. Bitcoin prices fell by approximately 31% from September, indicating that Tether's unrealized losses exceeded $3 billion. A slight decline in gold prices added several hundred million dollars in additional pressure. The equity buffer absorbed these fluctuations without threatening solvency, but this event highlighted how quickly capital can erode during market turmoil.

Crucially, the stress test also indicated that the barbell hedging strategy functioned as intended. During heightened risk aversion, Treasury prices rose, partially offsetting losses in cryptocurrencies. While the net equity loss was significant, it was not fatal, validating the effectiveness of the portfolio construction logic while also highlighting its limitations.

The deeper vulnerability lies in liquidity rather than solvency. If redemption demand surges under market pressure, Tether must convert assets into cash. Treasury and money market positions can be liquidated immediately. Gold requires a settlement period. Selling Bitcoin in a declining market can accelerate price drops. Secured loans cannot be demanded for repayment at any time without triggering borrower defaults. The order of liquidation under stress conditions determines whether solvency can translate into operational continuity.

VII. Political Economy

Any analysis of Tether's systemic status is incomplete without addressing its relationship with Cantor Fitzgerald and the implications following Howard Lutnick's appointment as Secretary of Commerce.

Since 2021, Cantor Fitzgerald has been Tether's primary banking partner and Treasury custodian, managing a significant portion of the company's sovereign debt. Reports indicate that this relationship includes approximately 5% equity, directly linking Cantor Fitzgerald's financial interests to Tether's profitability. Just the custody fees alone, for a portfolio exceeding $100 billion, can generate substantial revenue.

Lutnick's nomination and confirmation as Secretary of Commerce create a structural conflict that far exceeds conventional "revolving door" issues. The U.S. Department of Commerce plays a crucial role in international trade policy, the implementation of sanctions, and coordination with foreign governments on digital asset standards. The reciprocity provisions of the GENIUS Act grant the Secretary of the Treasury certain discretionary powers to determine which foreign regulatory frameworks meet the criteria for U.S. market access, with the Department of Commerce's opinion being critical in this decision.

The feedback loop is evident: favorable regulatory treatment for Tether increases demand for USDT, thereby enhancing Tether's profitability, which in turn boosts the value of Cantor's equity holdings, ultimately benefiting Lutnick's former company and potentially enriching his personal financial interests through asset divestiture arrangements.

Congressional scrutiny has also intensified. Senators have demanded full disclosure of Lutnick's financial arrangements with Cantor and have called for him to recuse himself from any matters affecting Tether. Critics point out that Cantor's affiliated companies have previously engaged in misconduct, including settlements related to money laundering associated with gambling, indicating a tolerance for compliance boundaries within the institution.

Tether's supporters counter that the relationship with Cantor legitimizes Tether's reserves in the institutional finance world, demonstrating the actual existence of these assets through the involvement of a regulated U.S. counterparty. Regardless of the moral implications, the practical outcome is that Tether's political fate is now partially tied to that of a senior government official.

VIII. Systemic Implications

Tether's rise has positioned it as a financial institution of sovereign scale, bringing about dynamic changes that existing regulatory frameworks struggle to address. The company is not a bank, thus lacking deposit insurance and lender of last resort status; it is not a money market fund, hence not regulated by the SEC; nor is it a foreign central bank, yet it holds reserves comparable to many foreign central banks.

This inherent ambiguity is not accidental but rather the source of Tether's competitive advantage. By operating in the gray areas of jurisdiction, the company avoids the compliance costs and operational restrictions faced by regulators while accessing the same foundational financial infrastructure through partners like Cantor.

Its macro-financial impact warrants clear articulation. Tether plays a role in channeling dollar liquidity into markets abandoned by the formal banking system. Each circulating USDT represents a dollar claim backed by U.S. sovereign debt held by individuals or entities outside the American banking system. This is a form of dollarization that does not require Federal Reserve involvement, a type of inclusive finance that lacks regulatory mechanisms.

For the United States, this dynamic presents a genuine contradiction. Tether extends dollar hegemony into the informal economy, supporting demand for U.S. Treasuries and reinforcing the dollar's status as the global unit of account. At the same time, it creates a parallel dollar system that Washington cannot directly control, potentially fostering activities that evade sanctions, avoid taxes, and facilitate illicit financing.

The GENIUS Act attempts to resolve this contradiction through duality: bringing compliant stablecoins under regulatory oversight while legally excluding non-compliant issuers from the U.S. market. The effectiveness of this approach depends on enforcement capabilities, which remain to be tested. The cryptocurrency market is global and largely anonymized; the practical ability to prevent U.S. citizens from accessing offshore stablecoins is limited.

IX. Future Trajectory

The current equilibrium is unstable. Several key drivers will determine Tether's trajectory and, consequently, the structure of global private dollar issuance.

The current state of balance is not stable. Various drivers will determine Tether's development trajectory and subsequently influence the structure of global private dollar issuance.

First, the Federal Reserve's interest rate path directly impacts Tether's profitability. Given the current scale of Treasury holdings, each 100 basis point rate cut would reduce its annual net interest margin by approximately $1.3 billion. Aggressive monetary easing would compel Tether to seek higher-yielding assets, potentially increasing risk asset allocations and exacerbating the vulnerabilities that led to S&P downgrading its rating.

Second, the implementation of the GENIUS Act will set a precedent for the treatment of offshore stablecoins. If the Treasury designates USDT as a primary money laundering target or if the Justice Department initiates enforcement actions, the resulting uncertainty could trigger redemption pressures unrelated to the underlying balance sheet fundamentals. Conversely, a lenient approach or favorable reciprocity decisions would validate the effectiveness of this bifurcation strategy.

Third, the acceptance of USDT in emerging markets will determine whether its supply continues to expand or stabilizes. Currency crises in economies like Argentina, Turkey, and Nigeria have driven strong demand for USDT, as citizens seek dollar exposure outside of banking systems that restrict foreign currency holdings. Ongoing monetary instability in these regions will promote economic growth; successful currency stabilization or effective capital controls could suppress economic growth.

Fourth, the competitive response from regulated stablecoins (especially Circle's USDC and potential bank-issued alternatives authorized under the GENIUS Act) will determine whether Tether faces substantial pressure in its core markets. While regulated stablecoins may offer poorer economic returns, they have significant institutional access advantages; the balance between the two remains unclear.

X. Conclusion

The essence of the so-called "Tether Theory" lies in the ability of private entities to successfully issue dollar-denominated debt at a sovereign scale, supported by their own reserves, while operating within a self-selected regulatory framework. Data from the third quarter of 2025 indicates that this theory is not mere speculation but a viable reality, generating billions in profits while serving hundreds of millions of users.

The U.S. response, embodied in the GENIUS Act, accepts this premise while attempting to benefit from it. Compliant stablecoins become an extension of Treasury financing, directing global demand for dollars toward federally regulated sovereign debt. Non-compliant issuers are legally excluded from U.S. jurisdiction, with their users and counterparties bearing the risks that Washington refuses to guarantee.

This duality creates a two-tier global dollar system. The first tier operates within U.S. regulatory jurisdiction, providing the safety and constraints of federal oversight. The second tier operates offshore, offering flexibility and yield at the cost of regulatory uncertainty and counterparty opacity.

Tether's strategic response is to retain USDT for offshore markets while launching USAT to meet U.S. compliance needs, representing its attempt to participate in both tiers of the system simultaneously. The success of this strategy depends on maintaining sufficient operational separation to prevent regulatory spillover while ensuring enough brand consistency to leverage brand reputation in promoting various products.

Its broader significance transcends any single company. Tether has demonstrated that private currency issuance can be achieved at a systemic scale, generating profits sufficient to offset operational complexities and regulatory risks. Now, other entities possess the infrastructure to replicate this model, whether they are private enterprises seeking returns or sovereign nations seeking alternatives to dollar hegemony.

Since the era of free banking in the 19th century, the international monetary system has never witnessed such large-scale private currency issuance. The differences between the two are evident: digital infrastructure enables global coverage that physical cash cannot achieve, while the inability to redeem for physical goods eliminates the automatic constraints faced by note issuers during the gold standard era.

Ultimately, the trajectory of future developments depends on numerous uncertainties that still exist. If Tether can overcome regulatory challenges and maintain sufficient reserves throughout market cycles, it will set a precedent for private currency issuance to become a permanent feature of the global financial system. Conversely, if enforcement actions or market pressures trigger a disorderly collapse, the resulting chain reaction will reshape how future generations regulate digital assets.

Undoubtedly, this experiment is significant. A privately held company based in the British Virgin Islands with a minimal workforce has constructed a monetary system comparable in scale to central banks, with profitability even surpassing that of central banks. The "Tether Theory" is no longer a hypothesis but a fact, and its impact is just beginning to be understood.

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