As we look beyond 2024, the future of Tether is intrinsically linked to the global standing of the US dollar and the evolving regulatory landscape for cryptocurrencies and stablecoins.
“The US dollar constitutes as much as 58% of the global foreign exchange reserves held by central banks worldwide,” says Drozdz. This significant share underscores the vested interest that many central banks have in maintaining the stability and strength of the USD.
While there have been discussions about challenging the dollar’s dominance, particularly among BRICS nations (Brazil, Russia, India, China and South Africa), these efforts are in their early stages.
“Attempts by BRICS countries to challenge the dollar’s dominance by creating a separate reserve currency seem to be in their infancy, especially considering that most BRICS members have increased the amount of dollars in their reserves since the group’s inception,” Drodz says.
“High confidence in the USD benefits Tether, which is largely backed by short-term US Treasury bonds.” This backing provides a level of stability and credibility to Tether that is crucial to its long-term viability.
However, the future of Tether isn’t solely dependent on the strength of the US dollar. Regulatory developments, both in Australia and globally, will also play a significant role in shaping its value.
“Australian regulatory authorities plan to include stablecoin regulations in the Digital Assets Bill, which is expected to be published by the end of 2024,” Drozdz says. This move towards regulation indicates a growing recognition of the importance of stablecoins in the financial ecosystem.
The Australian Securities and Investments Commission (ASIC) is also taking a collaborative approach to regulation, working with “governments and international regulators, such as the SEC, to better understand and enforce cryptocurrency regulations,” Drodz adds. This international cooperation could lead to more standardised and comprehensive regulatory frameworks for stablecoins like Tether.
Globally, the regulatory landscape for stablecoins is evolving at different speeds. While the United States has yet to introduce specific stablecoin regulations, the European Union has taken a proactive stance with the implementation of the Markets in Crypto-Assets (MiCA) regulations. Drozdz says that these regulations have sparked “mixed reactions in the cryptocurrency industry”.
On the one hand, they “bring greater clarity and reduce risk for market participants”. This increased clarity could potentially boost confidence in stablecoins like Tether, making them more attractive to a broader range of investors and users.
On the other hand, these regulations can also introduce significant restrictions, as evidenced by the fact that many stablecoins, including USDT, are unavailable in European markets due to MiCA regulations. This highlights the potential for regulatory actions to limit the availability and use of Tether in certain jurisdictions.
The Bull Case
The bull case for Australian investors holding USDT is intrinsically tied to the strength of the USD against the Australian dollar. Holding Tether is a bet that the AUD will weaken against the USD. Several factors could potentially drive this scenario, making Tether an attractive option for those betting on USD appreciation.
“It seems that the factors that could strengthen the US dollar are primarily a decrease in the unemployment rate, a possible rise in inflation, and continued dynamic GDP growth,” Drodz says.
“These factors could reduce the risk of a recession in the United States, which in turn could delay or slow down the Fed’s cycle of interest rate cuts. In such a scenario, the USD/AUD exchange rate could return to levels above 1.55, which would positively impact Australians holding Tether.”
It’s worth noting that while Tether’s growing adoption in various financial use cases is a positive sign, it’s unlikely to be a primary driver of exchange rate movements.
“A potential increase in Tether’s popularity in international trade and remittances is unlikely to have a significant impact on the exchange rate due to the still marginal size of the cryptocurrency market,” Drodz says.
However, Tether’s role as a digital representation of the US dollar could become particularly valuable during times of market turbulence. “In times of great uncertainty or crises, investors often exchange currencies from less stable countries for the US dollar, making Tether a potential ‘safe haven’ during periods of high market volatility,” he adds.
This “safe haven” status could make Tether an attractive option for Australian investors looking to protect their wealth during economic downturns or periods of heightened global uncertainty. By holding Tether, investors could potentially benefit from the flight to quality that typically favours the US dollar during such times.
The Bear Case
While Tether’s USDT offers Australian investors a unique way to gain USD exposure, it’s crucial to consider the potential risks and challenges that could impact its value and utility. The bear case for Tether encompasses both macroeconomic factors affecting the AUD/USD exchange rate and risks specific to the stablecoin itself.
A significant concern for Tether holders is the potential for a US economic downturn, Drodz argues.
“In the face of a recession in the United States, the US dollar could weaken because the Fed would be forced to lower interest rates sooner and more rapidly,” he says. Such a scenario could lead to a depreciation of the USD against the AUD, potentially eroding the value of Tether holdings for Australian investors.
Regulatory challenges present another substantial risk for Tether and its users. “If Australia adopts regulations similar to those in the European Union, legal trading of Tether will be restricted until the company offering the stablecoin meets regulatory requirements.” While specific regulations in Australia are yet to be defined, the potential for stricter oversight could significantly impact Tether’s availability and use in the Australian market.
Despite Tether’s current market dominance, with USDT accounting for around 69% of the total market capitalisation of all stablecoins, the stablecoin landscape is evolving. The emergence of new competitors, including central bank digital currencies (CBDCs), could potentially challenge Tether’s position in the future. However, Drozdz observes that CBDCs “have yet to gain significant popularity or scale,” suggesting that while competition is a factor to consider, it may not pose an immediate threat to Tether’s market position.
Perhaps the most significant risk factor for Tether investors is the potential for issues with its 1:1 dollar backing.
“The worst-case scenario that every stablecoin investor should consider is the potential loss of all funds,” Drozdz says.
“Until companies offering stablecoins are regulated and integrated into a system of strict regulatory oversight, there is a risk that the backing of these cryptocurrencies may prove to be fictitious or insufficient.”
Additionally, Tether, like other cryptocurrencies, can be subject to liquidity issues and market volatility. During periods of market stress, there could be challenges in converting large amounts of USDT to fiat currency without impacting its price. As a digital asset, Tether is also exposed to technological risks such as smart contract vulnerabilities, hacking attempts or other security breaches depending on where you are storing your holdings.
