What happens to Tether, stablecoins in the event of dollar collapse?

Private cryptocurrencies have arisen as the most recent version of money throughout the last decade. This is especially true for stablecoins, which Harvard Business Review describes as “a private kind of money” that provides an efficient alternative to state-backed cash.

While a typical industry narrative portrays cryptocurrencies as distinct from the traditional system, there is some entanglement between the two. The top three stablecoins, for example, are backed by the US dollar.

With economists continuing to raise the alarm about the deteriorating macroeconomic situation, it begs the issue of what will happen to stablecoins if a currency crash occurs.

The rise of stablecoins

Stablecoins are digital currencies that are tied to another asset, such as cash, gold, or a cryptocurrency token (as in the case of algorithmic stablecoins), in order to stabilize its price. They allow investors to cycle in and out of crypto currencies in order to mitigate market volatility.

Stablecoin market values have expanded significantly in recent years, reflecting their increasing popularity and significance over time.

Tether's market cap was around $15 million at the start of 2017. This peaked at $83 billion in May 2022, a more than 5,500x growth in five and a half years.

Because Tether tokens are redeemable for dollars, the corporation must keep an equivalent amount of cash on hand to honor redemptions. However, worries regarding the company's reserves being sufficient to support its token issuance have been voiced throughout its life.

“All Tether tokens (USD₮) are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether's reserves. We keep a daily record of our overall assets and reserves.”

Despite this, every stress test administered to Tether has resulted in a pass. Furthermore, it maintains its position as the leading stablecoin, routinely generating more trading volume than any other token on a daily basis.

Stablecoins have piqued the interest of authorities, who are attempting to regulate and manage them in the name of consumer protection. Considering the de-peg of algorithmic stablecoin Terra UST in June, which is believed to have cost $42 billion, some argue that this is the correct course of action.

When it comes to regulating stablecoins, one recurring theme across worldwide authorities is to regulate for stablecoin systems rather than merely the token itself. The IMF, for example, stated that “requirements for stablecoins should include the entire ecosystem and all of its key services.” Similarly, the BIS advocated directly incorporating supervisory requirements into stablecoin systems.

It is uncertain how these ideas might operate in practice at this time, particularly the concept of embedded supervision, which has echoes of Central Bank Digital Currency. Nonetheless, it looks that managing stablecoin issuers is the preferred option. Again, this raises concerns about jurisdiction and censorship.

The upshot here is that global authorities regard stablecoins as “their own,” at least in their thoughts, and strive to integrate them into the system, further blurring the distinction between stablecoins and legacy finance.

Markets flip bearish for 2023 following the FOMC meeting

Fed Chair Jerome Powell announced a 50 basis point (bps) rate raise on December 14, raising the federal funds rate to 4.5%.

Even though markets projected a 50 basis point increase, Bitcoin initially fell 3.2%, with sell-side momentum continuing into the next day. Similarly, the Dow, S&P 500, and Nasdaq all saw sell-offs.

Powell's statements during the news conference took a strongly hawkish tone, putting an end to the prospect of a pivot anytime soon. He noted that additional evidence of inflation management was needed before the central bank would contemplate changing course.

“To the degree that we need to maintain rates higher for a longer period of time.”

Markets recognized that GDP growth in 2023 will be limited, and the terminal rate is now likely to be greater than the previously claimed 5%.

Furthermore, it is evident from the press conference that Powell is advocating for a lot more hardship before changing course on interest rates.

Currency crisis

From the standpoint of faith in the social order, the collapse of a major currency, such as the dollar, is unimaginable. Recent developments, however, such as the rising cost of living and the punitive response to Covid, have damaged people's faith in the institution.

Furthermore, history is filled with examples of currencies reverting to their intrinsic worth, which, according to François-Marie Arouet, better known by his pen name Voltaire, is zero.

“All paper money returns to its intrinsic value: zero.”

Despite talking heads downplaying the gravity of decades of cheap money and reckless money creation, a closer examination reveals massive deficits, asset overvaluation, and high inflation that cannot be dismissed as ephemeral or trivial.

A recent ZeroHedge post titled “BlackRock: Prepare For Recession ”Like No Other“... And ”Won't Work Now provided a bleak image of what was to come.

According to the report, the global economy has already departed from 40 years of stable development and has entered a period of increased volatility. As a result, macro volatility should be expected across the board.

Furthermore, unlike in previous recessions, BlackRock believes that central banks will not come to the rescue this time. This leaves just one possibility: a deep recession, with some forecasting a brutal depression.

The Weimar Republic's post-World War I crisis in Germany, Argentina's late 1990s crisis, and Venezuela's 2016 crisis, to mention a few, all have one thing in common: the people's lack of faith in the currency.

With this in mind, central banks are treading on risky ground. And, with economic warning lights blazing red, how long can fiat currencies stay afloat？

Tether co-founder Reeve Collins told WikiBIT that if the worst were to happen, a dollar collapse would mean Tether would no longer be backed, rendering it unable to perform its intended purposes.

However, if such a scenario occurred, “greater difficulties than fiat-backed stablecoins not having any value” would arise, according to Collins.

The end of fiat-backed stablecoins？

Nonetheless, Collins is confident that the existing cryptocurrency infrastructure provides a ready-to-go alternative financial system and methods of transacting, mitigating the chaos of a currency collapse to some extent.

People have switched to alternative currencies in case studies of currency crises. For example, with the fall of the bolivar, the dollar accounted for 50% of Venezuelan transactions at one time, and Bitcoin trade volumes also increased.

Is a collapse of the dollar the end of stablecoins？ Collins speculated that the hole created by defunct fiat-backed stablecoins could be filled by algorithmic stablecoins.

“I believe that at some time, new algorithmic stables will emerge that are as stable as their fiat-backed counterparts, but we are not there yet.”

Although the Terra UST meltdown tarnished the reputation of algorithmic stablecoins in general, this was due to flaws in the architecture of the LUNA pegging system, rather than a defect in the concept of pegging to a cryptocurrency per se.

In a post-apocalyptic future, people will trade using whatever they have trust in to preserve money, provide a unit of account, and provide a method of exchange. With fiat out of the picture, what else could serve those purposes better than an algorithmic stablecoin？

As a reminder, WikiBit is ready to help you search the qualifications and reputation of projects in a bid to protect you from hidden dangers in this risky industry!