Ripple versus Tether: Will USDT be severely punished by the SEC?

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Recently, comments from Ripple executives have once again pushed USDT to the forefront. Ripple CEO Brad Garlinghouse pointed out that the U.S. government may target Tether as the next regulatory target. This news triggered widespread attention and discussion in the market. Although Tether insists on the transparency and compliance of its USDT, questions surrounding its potential risks continue.

The war of words between USDT and Ripple

According to the timeline, the recent war of words between Ripple and USDT can be divided into the following events:

May 6 , Ripple Chief Technology Officer David Schwartz revealed the company’s multiple upcoming integration plans at the XRP Las Vegas conference. He introduced XRP Ledger related information, including automatic market maker (AMM), lending protocol, Ripple stable currency and artificial intelligence, etc. Schwartz noted that details of the Ripple stablecoin will be announced at the XRPL Apex event in Amsterdam in June.

Previously, it was reported that Ripple plans to issue a stablecoin backed by the US dollar. The stablecoin is expected to be released later this year and will be 100% backed by U.S. dollar deposits, short-term U.S. government debt and other cash equivalents, the company said. The stablecoin will first be deployed on Ripple’s institution-focused XRP Ledger and Ethereum blockchains, and is based on Ethereum’s ERC-20 token standard.

On May 13, Ripple CEO Brad Garlinghouse said in a recent interview that the next target of the US government is Tether, the stablecoin company responsible for the circulation of USDT stablecoins. He believes Tether is an important part of the cryptocurrency market system and he is unsure how this will affect the rest of the market. Some experts believe that the Ripple CEO’s statement is a very big inside message. If it really happens, there will be very large selling pressure in the USDT stablecoin market, and the USDT price may fall sharply.

On the same day, USDT CEO Paolo Ardoino publicly hit back at Ripple on Twitter: "A CEO, leading a company that is under investigation by the U.S. Securities and Exchange Commission (SEC), launched a competing product stablecoin, and he is spreading fear about USDT."

Later, Ripple CEO Brad Garlinghouse responded: "I am not attacking Tether...the next sentence I said in the podcast. Yes, I think Tether is a very important part of the ecosystem, and my point is that the U.S. government has made it clear that they want more control over issuers of dollar-backed stablecoins, so Tether, as the largest player, is Within their sights”

At the same time, a note of news is that on April 25, Maxine Waters, the Democratic leader of the U.S. House Financial Services Committee, predicted on Wednesday that she and Chairman Patrick McHenry would soon. Agreement on Stablecoin Regulatory Legislation. "We are working toward a stablecoin bill in the short term," Waters said in an interview. She added that she had discussed stablecoins with Senate Majority Leader Chuck Schumer and Senate Banking Chairman Sherrod Brown, and said the Federal Reserve, Treasury Both the Department and the White House were involved in drafting the bill. The impact of this bill on current stablecoin issuers is unclear.

Will it be a surprise: Why does USDT use Bitcoin as a reserve asset?

According to the transparency report on the USDT official website, all reserve assets are listed: cash and cash equivalents and other short-term deposits account for 84.05% of the total reserves, which is broken down into: U.S. Treasury bonds account for 79.88%, overnight reverse Repurchase agreements accounted for 12.2%, term reverse repurchase agreements accounted for 0.9%, money market funds accounted for 6.77%, cash and bank deposits accounted for 0.11%, and non-U.S. Treasury securities accounted for 0.13%. This part of the asset has a high degree of liquidity and security and is the core of Tether's reserves and generally the core of major stablecoin protocols. However, Bitcoin accounts for 4.87% of the total, which is also the core point of controversy.

The core point of stablecoins should be to keep the token pegged to the U.S. dollar. At this point, in order to maintain the stability of USDT, it seems that there should be no cryptocurrency-related assets in the reserve assets to isolate the correlation of USDT. If there is something similar to FTX-related events, theoretically there will be a large number of USDT redemption requests and Bitcoin sales needs in the market. Then if there is a connection between the two, it is possible to form a death spiral: there is a problem in the market – Selling Bitcoin – USDT’s reserve asset value declines – USDT decoupling occurs – market panic increases, USDT experiences a run, and more Bitcoins are sold off. From this perspective, USDT really should not add Bitcoin to the reserve assets. In comparison, USDC’s reserve assets only include real-world assets.

The advantage is that Bitcoin can diversify reserve assets and help reduce the risks caused by the fluctuation of a single asset. The most important function is that Bitcoin can hedge against legal currency risks and reduce the degree to which reserve assets are bound to the U.S. dollar and U.S. debt. Holding Bitcoin protects Tether from the depreciation of fiat currencies such as the U.S. dollar, and Bitcoin may provide a better long-term store of value in some cases, which adds a layer of security to Tether's overall reserves. Also, compliance with the cryptocurrency ecosystem is one of the reasons why Tether chose Bitcoin. As a cryptocurrency, Bitcoin as a reserve asset is more in line with Tether's positioning in the cryptocurrency ecosystem.

However, Tether’s current excess reserves are $6,261,866,717, a percentage of its total liabilities of 6.02%. In other words, even if all the Bitcoins in Tether's asset library disappear overnight, theoretically, Tether should not be decoupled.

Pros and Cons

According to reports, Tether’s net profit exceeded $4.52 billion in the first quarter of 2024, setting a record high. Judging from this data, analysts said that USDT is actually the most successful project in the RWA sector in the cryptocurrency field, and it is also a symbol of the US dollar's important influence in the cryptocurrency field. Therefore, the U.S. government has no reason to trouble Tether. At the same time, this profit margin also greatly reduces the view that some people think that Tether will rug: maintaining the existing profit margin and operating, the profit margin gained will be much higher than the income brought by a one-time rug.

However, many KOLs believe that since most stablecoins are currently priced in US dollars, regardless of whether it is Tether or Circle, the status of US dollar pricing will not change. On the contrary, KOL Mr.man said,

“Please allow me to say what Ripple cannot directly express.

Tether has not been directly affected by the US Financial Crimes Enforcement Network (FinCEN). or regulation by government agencies such as the Federal Reserve. It is merely registered with FinCEN for reporting purposes, which does not equate to being regulated. Tether operates from the British Virgin Islands and is outside the jurisdiction of major financial regulators. Its reserves lack transparency and Oversight.

Nonetheless, Tether companies are required to provide monthly certification; as mandated by the New York State Department of Financial Services (NYDFS), they only provide quarterly certification under pressure.

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