A US Debt Default could destroy Tether (USDT), the most popular stablecoin. Frighteningly, such a debt default could occur within a few weeks.
There is a significant risk that the US could default on its debt “at some point in the first two weeks of June,” the Congressional Budget Office (CBO) speculates. To explain, US law limits the amount of debt the Treasury Department can issue with the debt ceiling. If the amount of debt issued hits the debt ceiling, the treasury cannot issue debt.
The US hit the debt ceiling on 19 January 2023. Since then US Treasury Secretary Janet Yellen has been using “extraordinary measures” to finance federal spending. On 1 May 2023, Yellen warns she will run out of extraordinary measures on 1 June 2023.
How Likely is a US Debt Default?
CBO analysts think tax revenues and emergency measures could keep the federal government running until 15 June 2023. If Yellen can find enough money to operate until 15 June, the CBO claims, tax revenues will “will probably allow the government to continue financing operations through at least the end of July.”
However, a debt default could occur if the US Treasury cannot find more money in early June. A debt default could severely harm the United States economy and the US dollar.
How a Debt Default Threatens Tether (USDT)
For example, Moody’s estimates that even a short debt limit breach could kill two million US jobs and lead to a decline in US gross domestic product (GDP). This could hurt Tether by cutting demand for the US dollar and the dollar’s value.
A debt ceiling breach ceiling caused a 45% drop in the stock market’s value in a first-quarter 2023 simulation, the White House claims. A long-term debt default could destroy eight million US jobs.
Peterson Institute economists warn a debt default could weaken the dollar and reduce the demand for dollars, The White House reports. “This weakening of official dollar purchases would likely increase volatility in the dollar’s value against other currencies and decrease liquidity, prompting investors to reduce their holdings of dollars in any form,” Peterson warns.
This could hurt Tether because Tether’s attraction is that it pays in US dollars. Tether’s stablecoins contain a smart contract that makes dollar payments from a trust account. If there is less demand for US dollars, I think there will be less demand for Tether.
Why Tether (USDT) is vulnerable to a debt default
Tether (USDT) is vulnerable to a debt default because Tether Holdings Limited held $53.045 billion US Treasury Bills on 31 March 2023.
Thus, US Treasury Bills comprise the bulk of Tether’s $81.833 billion in assets. I estimate US Treasury Bills comprise almost 65% of Tether’s assets. Moreover, US Treasuries are most of Tether’s $69.314 billion in cash, cash equivalents, and short-term deposits.
Hence, any drop in Treasuries’ value or could cut Tether’s value because it has little to fall back upon. For example, on 31 March 2023, Tether’s other cash assets were $7.5 billion in Overnight Reverse Purchase agreements, $786.851 million in Term Reverse Repurchase Agreements, $7.453 billion Money Market Funds, $481.351 billion in cash and bank deposits, and $47.681 million in non-US Treasury bills.
Therefore, any Treasury market volatility could hurt Tether. It could also increase Tether’s operating costs. The Brookings Institute estimates a debt default could increase Treasury Market costs by $750 billion over 10 years.
Tether also had $12.519 billion in non-cash assets on 31 March 2023. The non-cash assets were: $140.669 million in corporate bonds, $3.391 billion in precious metals (I assume this is mostly gold), $1.5 billion in Bitcoin (BTC), $2.138 billion in “other investments,” and $5.349 billion in secured loans. In contrast, Tether had $69.314 billion in cash and cash equivalents.
How Safe are Tether’s Stablecoins?
Thus, Tether Holdings Limited is a cash-rich company with plenty of assets to back its stablecoins. However, the debt default threatens some of those assets. There are five Tether stablecoins: USD₮, EUR₮, MXN₮ and CNH₮, and XAUT. For instance, MXNT is the Mexican Peso Tether. Mexican Peso Tether pays one Mexican Peso when spend it.
Mexican Peso Tether (MXNT) was CoinMarketCap’s 5,469th ranked cryptocurrency with a $0.05712 Coin Price on 16 May 2023. MXNT had a $1.117 million Market Cap, a $1.147 million Fully Diluted Market Cap, a 24-Hour Market Volume of $4,632 and a Centralized Exchange (CEX) Volume of $4,609 on 16 May 2023, CoinMarketCap estimates. They base those numbers on a Self-Reported Circulating Supply of 19.562 million MXNT and a Maximum Supply of 20 million MXNT.
Tether EURt (EURT) was CoinMarketCap’s 2,773rdh ranked cryptocurrency with a $1.09 Coin Price on 16 May 2023. EURt had a $43.478 million Market Capitalization, a $54.315 million Fully Diluted Market Cap, a $1.390 million 24-Hour Market Volume, and a $1.390 million Centralized Exchange (CEX) Volume on 16 May 2023. They base those numbers on a Self-Reported Circulating Supply of 40.001 million EURT and a Total Supply of 50.001 million EURT.
Tether CHN (CHNT) is a Chinese Yuan stablecoin. Notably, CoinMarketCap did not provide a price for CHNT on 13 May 2023. However, Tether claimed to have ¥20,503,468.90 ($29.467 million) in NHT on 13 May 2023.
Tether Gold (XAUT)
Tether Gold (XAUT) is a stablecoin backed by 611 gold bars or 7,643.71 Gold kilograms. They claim Tether Gold’s Coin Price matches the market price of a troy ounce of gold.
Gold was trading at $1,993.20 a troy ounce on 13 May 2023, Markets Insider reports. However, CoinMarketCap gave Tether Gold a $1,997.69 Coin Price on 16 May 2023.
Tether Gold is popular. It was CoinMarketCap’s 214th ranked cryptocurrency on 16 May 2023. CoinMarketCap gave XAUT a $492.393 million Market Cap, a $492.320 million Fully Dilluted Market Cap, a $12.737million 24-Hour Market Volume on 16 May 2023. They base those numbers on a Circulating and Total Supply of 246,524 million XAUT.
I think Tether Gold’s price could rise if there is a US deficit default. To explain, many people buy gold as a hedge in times of income insecurity. Tether Gold is an interesting alternative to physical fast because you can sell it fast for fiat currency. Users can verify Tether Gold’s bullion through the Tether Gold website.
Interestingly, Tether claims they can deliver physical gold bars to any address in Switzerland for paranoid rich people.
How Safe is Tether (USDT)?
Tether (USDT) is the world’s most popular stablecoin and CoinMarketCap’s third-ranked cryptocurrency on 16 May 2023.
CoinMarketCap gave Tether a $0.9999 Coin Price, an $82.832 billion Market Capitalization, a Fully Diluted Market Cap of $86.100 billion, and a $19.956 billion 24-Hour Market on 16 May 2023. There was also a $19.486 billion Centralized Exchange (CEX) Volume, and a Decentralized Exchange (DEX) Volume of $469.771 million on 16May 2023. They base those numbers on a Circulating Supply of 82.823 billion USDT and a Total Supply of 86.091 billion USDT.
I think Tether (USDT) will retain its popularity and value because of the US Dollar’s position as the world’s reserve currency. To explain, the reserve currency is the fiat currency financial institutions and corporations use for cross-border transactions.
Is the Yuan a threat to the US Dollar or Tether?
I cannot see anything replacing the dollar even with rising Chinese Yuan use. For example, the yuan became the second most important currency in the Central Bank of Brazil’s foreign reserves in March 2023. Yuan comprises 5.37% of the Banco Central do Brazil’s holdings, Reuters reports.
Importantly, the Industrial and Commercial Bank of China (ICBC) is now processing cross-border yuan settlements in Brazil, Global Times reports. The People’s Bank of China has made ICBC a yuan clearing bank in Brazil. That means Chinese customers can pay Brazilian companies in yuan.
Thus, Yuan use is growing, which could boost the CHNT. However, I don’t consider the yuan a threat to the dollar of Tether.
Instead, I think the dollar could lose value but it will retain its reserve currency status for a long-time. Historically, currencies only lose reserve currency status after catastrophes, such as revolutions or military defeats. For example, the British Pound Sterling lost its reserve currency status after the Nazi victory in the Battle of France in 1940.
Similarly, the French livre lost its value and reserve currency status after the French Revolution. Civil unrest in the Netherlands in the 1780s destroyed the Dutch Gilder Europe’s 18th century reserve currency. Consequently, I think the dollar will dominate the currency markets for the foreseeable future.
In the final analysis, I think all the Tethers are interesting stablecoins that will keep their value. Even if a debt default wreaks havoc with the US treasury market. The dollar will survive and so will Tether. Although smart investors should investigate cash alternatives such as Tether Gold (XAUT).