Tether (USDT) currently has no real competition in the stablecoin market. As data from Longhash shows, close to $8 billion in USDT currently exists, and the second largest stablecoin, USD Coin (USDC), has a current supply of roughly $750 million.
Tether is a magnet for controversy. There are questions about whether the company behind Tether actually has the money to back the stablecoin, and some academics think it could be used to manipulate the entire Bitcoin market (others dispute this). The reality is people still demand Tether more than any other stablecoin when they’re searching for a break from crypto volatility — and it’s not even close.
It is tempting to attribute Tether’s dominance to network effects. As indicated by Bitfinex CTO Paolo Ardoino on a recent edition of Messari’s Unqualified Opinions, a lot of Tether’s success has to do with the fact that it was the first stablecoin on the market. Much like Bitcoin in the cryptocurrency space, Tether benefited greatly from building a network around its stablecoin before anyone else got started. Tether launched in 2014, while a later stablecoin boom took place in 2018.
So while network effects are clearly a factor in Tether’s success, the stablecoin has another key advantage as well. USDT appears to be less accessible to regulators and lawmakers than the other stablecoins on the market. While other stablecoins have had backdoors implemented in them with the explicit purpose of assisting law enforcement, and have gone as far as to get extra regulatory approval from the New York State Department of Financial Services (NYDFS), Tether has faced subpoenas from regulators and lawsuits.
This desire from the issuers of USDC, Gemini Dollar (GUSD), and other more recent stablecoins to appease regulators may have been a mistake. After all, if you’re compliant with regulators, how are you supposed to differentiate yourself from something like PayPal? As I’ve written previously, what is the purpose of issuing a stablecoin on a public blockchain at that point? The digital asset is still centralized behind the issuer, so the use of a public blockchain may only add unnecessary costs due to the higher fees that are generally associated with decentralized systems.
Indeed, Tether benefits greatly from the fact that people think there is a lower chance their funds will be seized if they use USDT over something like USDC. A digital asset that is unlikely to be seized is much more useful than one that literally has backdoors built into it for law enforcement. This is why Bitcoin was created in the first place.
As an example of this market advantage for USDT, some traders in China have a preference for USDT because they think it is less likely that money held in this particular stablecoin will be frozen, according to Castle Island Ventures Partner Nic Carter.
Tether would dispute the idea that they aren’t willing to work with regulators, and the reality is that the company behind the stablecoin also has the ability to freeze funds. This functionality was added after the Tether treasury on Omni was hacked in 2017. However, Tether operates on a number of different cryptocurrency networks and it isn’t clear if a backdoor is built into all of them. Late last year, the Human Rights Foundation (HRF) found 16 instances of Tether funds being frozen in the past. According to HRF Privacy Technology Fellow Eric Wall, the circumstances around these funds being frozen point to exchange hacks as the likely reason. Ardoino confirmed this in a recent tweet.
Despite these facts, this perception that USDT is less likely to be frozen than its counterparts still very much exists. However, it’s important to remember that there are limits to what people can get away with when using USDT. Don’t expect any darknet markets to add the stablecoin as a payment option anytime soon.
It should also be noted that, as BitMEX Research and I have concluded in the past, Tether also comes with its own set of tradeoffs in that the system could be entirely shut down on rather short notice by law enforcement, similar to what happened with the gold-backed digital currency Liberty Reserve in 2013.
On a related note, it’s likely that all stablecoins will become more heavily regulated over time, as they aren’t actually more decentralized or censorship resistant than traditional, centralized payment solutions at a technical level. At that point, crypto-collateralized stablecoin solutions, such as Dai, may become more popular.