Tether (USDT) Death Spiral Risk Analysis Report

Tether (USDT) is a cryptocurrency that is pegged to the US dollar. It is the most widely used stablecoin, and it has a market capitalization of over $130 billion. However, USDT faces a number of risks that could lead to a death spiral, in which the value of USDT collapses. These risks include regulatory risks, competitive risks, litigation risks, and alternatives.

Stablecoins, a rapidly growing asset class, have attracted significant attention from regulators worldwide. Among them, Tether (USDT) is undoubtedly the most representative. As of November 2024, USDT's market capitalization stands at approximately $132.3 billion, accounting for over 90% of the entire stablecoin market, which is expected to exceed $2.8 trillion by 2028. However, despite its dominance, USDT faces several key risks that could potentially impact its stability and value.

One major risk is the regulatory dynamics surrounding stablecoins in the United States. On June 7, 2022, U.S. Senators Cynthia Lummis (Republican, Wyoming) and Kirsten Gillibrand (Democrat, New York) introduced the Payment Stablecoin Act, also known as the Lummis-Gillibrand (L-G) Act. This bill, if passed, would be one of the most significant pieces of legislation targeting stablecoins, especially USDT, in recent years.

The bill would allow non-depository trust companies (non-banks) to issue stablecoins through their own channels as long as the nominal value of all their tokens is below $10 billion. However, for stablecoin issuers to operate legally at a scale exceeding $10 billion, they must be "authorized depository institutions as national stablecoin issuers." According to the Lummis-Gillibrand Act, centralized stablecoin companies like Circle (USDC, issuing $33 billion) or Paxos (PAXD) will have two options: either operate through state-level non-bank financial institutions or become depository institutions at the federal or state level that serve as national payment stablecoin providers, similar to money market funds or primary dealers in traditional financial institutions. In the L-G Act, only stablecoins that can be redeemed for sovereign fiat currency at any time, with non-crypto assets as the underlying anchor for MoE, are defined as payment stablecoins. Only payment stablecoins like USDT (depository institution type) and USDC (non-depository institution type) fall under the jurisdiction of the L-G Act, while algorithmic stablecoins and over-collateralized crypto-backed stablecoins (like DAI) are excluded.

At the same time, the L-G Act also includes long-arm jurisdiction clauses, meaning these laws will apply to companies outside the United States. Although Tether is registered in the British Virgin Islands (BVI), it is expected to be subject to this act's jurisdiction because USDT is widely circulated among U.S. investors and exchanges. The act directly identifies Tether and USDT as being within its scope. Tether claims it does not serve U.S. customers, as it does not directly issue tokens to these companies and individuals, but U.S. policymakers are unlikely to accept this regulatory evasion.

Therefore, Tether faces the risk of being issued a prohibition order by the U.S. Treasury or SEC. The L-G Act requires depository institutions to obtain approval from federal or state banking regulators before issuing and redeeming payment stablecoins, and they must be backed by high-quality liquid assets at no less than 100% of the issuance value (such as U.S. dollars, U.S. Treasury bonds). They must publicly disclose the number of outstanding payment stablecoins and detailed information about the assets supporting them and their values monthly, and they are obligated to redeem all outstanding payment stablecoins at face value in fiat currency upon customer request. If Tether triggers such potential obligations or fails to fulfill redemption and disclosure obligations, leading to a prohibition on conducting dollar-related business (Tether has no legal license in the U.S., making its business involving the U.S. effectively illegal), it could result in severe fluctuations in the value of USDT, causing it to decouple from the dollar and enter a death spiral similar to UST.

Additionally, the SEC's attitude towards Tether is also ambiguous. Gary Gensler has publicly stated that he believes "only BTC is a commodity, while all other cryptocurrencies are securities," and has repeatedly expressed serious concerns that stablecoins could disrupt the U.S. financial market. If Tether is classified as a security and brought under regulation, it would undoubtedly deal a heavy blow to USDT, which is a significant part of the gray market, and this news could become a trigger for a run on USDT.