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

Over the past decade, private cryptocurrencies have emerged as the latest iteration of money. This is especially true for stablecoins, which Harvard Business Review deemed “a private form of money,” offering an efficient alternative to state-sanctioned fiat.

While a common industry narrative seeks to portray cryptocurrencies as separate from the legacy system, a degree of entanglement between the two exists. For example, the U.S. dollar backs the top three stablecoins.

With economists continuing to sound the alarm on the worsening macroeconomic landscape, this poses questions about what may happen to stablecoins should a currency collapse occur.

The rise of stablecoins

Stablecoins are digital currencies pegged to another asset, which may include fiat, gold, or a cryptocurrency token (such as in the case of algorithmic stablecoins), to stabilize its price. They offer investors a means to cycle in and out of crypto tokens and counter market volatility.

In recent years, stablecoin market caps have grown exponentially, demonstrating their rising popularity and influence over time.

At the start of 2017, Tether’s market cap was around $15 million. In May 2022, this peaked at $83 billion, equating to a more than 5,500x increase in five and a half years.

In theory, as Tether tokens are redeemable for dollars, the company must hold an equivalent amount in cash to honor its redemptions. But throughout its existence, doubts about the company’s reserves being sufficient to cover its token issuance have been raised.

“All Tether tokens (USD₮) are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves. We publish a daily record of the current total assets and reserves.”

Despite that, to date, every stress test levied at Tether has resulted in a pass. Further, it still manages to retain its position as the leading stablecoin, consistently turning over more trading volume than any other token daily.

For various reasons, stablecoins have caught the attention of authorities, who seek to regulate and control them under the mandate of consumer protection. Taking into account the de-peg of algorithmic stablecoin Terra UST in June, which is estimated to have lost $42 billion, some say this is the right thing to do.

When it comes to regulating stablecoins, a common theme among global authorities is to legislate for stablecoin systems, not just the token itself. For example, the IMF said, “requirements on stablecoins should cover the…