Cryptocurrency

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

Hull Invest

Over the past decade, private cryptocurrencies have emerged as the newest currency. This is especially true for stablecoins. harvard business review It is considered a “private currency” and provides an efficient alternative to state-sanctioned fiat currencies.

Common industry narratives attempt to portray cryptocurrencies as separate from traditional systems, but there is a degree of entanglement between the two. For example, the US dollar underpins the top three stablecoins.

Economists continue to warn of deteriorating macroeconomic conditions, raising questions about what will happen to stablecoins in the event of a currency collapse.

Rise of stablecoins

A stablecoin is a digital currency pegged to another asset, including fiat currency, gold, or a cryptocurrency token (as in the case of algorithmic stablecoins), in order to stabilize its price. They provide investors with the means to cycle crypto tokens in and out and counteract market volatility.

The market capitalization of stablecoins has grown exponentially in recent years, demonstrating their increasing popularity and influence over time.

At the beginning of 2017, Tether had a market cap of around $15 million. By May 2022, it will reach $83 billion, representing a more than 5,500-fold increase for him in five and a half years.

Theoretically, tether token If redeemable in dollars, the company must hold a substantial amount of cash to make the redemption. However, throughout its existence, questions have been raised whether the company’s reserves are sufficient to cover its token issuance.

“All Tether tokens (USD₮) are pegged 1:1 with their corresponding fiat currency and are 100% backed by Tether reserves. Publish daily record of current total assets and reserves doing.”

Nevertheless, to date, all stress tests imposed on Tether have resulted in passing. Moreover, it still successfully maintains its status as a leading stablecoin, consistently trading more volume than any other token on a daily basis.

For a variety of reasons, stablecoins have attracted the attention of authorities seeking to regulate and control them under consumer protection mandates. Considering the de-pegging of algorithmic stablecoin Terra UST in June, this is presumed lost $42 billionsome say this is the right thing to do.

When it comes to stablecoin regulation, a common theme among global authorities is to legislate not just the tokens themselves, but the stablecoin system. for example, IMF “Stablecoin requirements should cover the entire ecosystem and all its key features.” Similarly, Screw Suggested embedding directed by requirement into the stablecoin system directly.

At this time, it is unclear how these ideas will work in practice. In particular, the concept of built-in surveillance with shades of central bank digital currencies is unclear. That said, the strategy of controlling stablecoin issuers appears to be favored. Again, this raises some questions regarding jurisdiction and censorship.

The point here is that global authorities, at least in their minds, recognize stablecoins as “their own,” further blurring the line between stablecoins and traditional finance. That’s it.

Market turns bearish after 2023 FOMC meeting

On December 14, Fed Chairman Jerome Powell announced a 50 basis point (bps) rate hike and raised the fund rate to 4.5%.

Although the market expected a 50 bps gain, Bitcoin reacted to an initial 3.2% drop, with sell-side momentum continuing into the next day. Similarly, the Dow, S&P 500, and Nasdaq have all been put up for sale.

At the press conference Powell‘s comment was decidedly hawkish in tone, and it paid off with the idea of ​​changing its pivot immediately. He added that the central bank needs more indications that inflation will be contained before it considers a change of course.

“As long as we need to keep interest rates higher and keep them that way longer”.

Based on this, the market understands that GDP growth in 2023 will be minimal, and the current terminal rate may be higher than the previously advertised 5%.

Moreover, after the press conference, it’s clear Powell wants more pain before the rate U-turn.

currency crisis

The collapse of a major currency such as the dollar is unthinkable from the standpoint of trust in social order. However, recent events, such as the cost of living crisis and the draconian response to Covid, have shaken people’s confidence in the establishment.

Moreover, history is littered with examples of currencies returning to their original value, according to French authors and public activists. Francois Marie Arouetbetter known by his pseudonym Voltaire, is Zero.

“All paper money eventually returns to its original value of zero.”

Despite headlines downplaying the seriousness of decades of cheap currency and reckless money printing, a deeper look reveals huge deficits, overvalued assets, and high inflation. and can no longer be dismissed as temporary or insignificant.

Recent articles from zero hedge “BlackRock: Preparing for a Recession ‘Unlike Others’… And What Worked Before ‘It Won’t Work Now’ Painted a Dire Picture of What Might Happen.”

The article said the global economy had already slipped out of 40 years of stable growth, adding to volatility.

Moreover, unlike past recessions, the central bank will not come to the rescue this time, BlackRock said. This leaves him with one option: a deep recession, with some predicting a painful recession.

Crisis of the Weimar Republic in Germany after World War I, Argentina in the late 1990s and Venezuela in 2016 have one thing in common. It is the loss of people’s confidence in the currency.

With that in mind, central banks are on a dangerous path. And with the economy’s warning signs flashing red, how long can fiat currencies continue to languish?

Tether co-founder Reeve Collins said: crypto slate In the worst-case scenario, a collapsing dollar would mean that the Tether would fall out of favor and fail to perform its intended function.

However, if such a scenario were to play out, it would create “bigger problems than fiat-backed stablecoins having no value,” Collins said.

The end of fiat-backed stablecoins?

Still, in this hypothetical scenario, Collins is optimistic that the existing cryptocurrency infrastructure will provide an out-of-the-box alternative financial system and means of exchange, denying some of the chaos of a currency collapse.

Currency collapse case studies show people switching to alternative currencies.For example, at some point after the Bolivarian collapse, the dollar half Venezuela’s trading volume increased, and so did Bitcoin’s trading volume.

Will the Collapse of the Dollar Mean the End of Stablecoins? Collins said the void left by obsolete fiat-backed stablecoins could be filled by algorithmic stablecoins. I’m guessing

“I believe that at some point there will be a stable version of the new algorithm that proves to be as stable as its fiat-backed counterpart, but we are not there yet.”

In general, the algorithmic stablecoin reputation was tarnished by the Terra UST implosion, but this was due to a weakness in the design of the LUNA pegging system, not a flaw in the concept of pegging to the cryptocurrency itself.

With that in mind, in a post-apocalyptic world, people trade using whatever they believe to store wealth, provide a unit of account, and provide a means of exchange. Now that it’s all screwed up, what else can perform these functions better than algorithmic stablecoins?

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