The Rise of Tether and the Centralization of the Stablecoin Market
Tether has emerged as the dominant stablecoin with a market share of 61.5%, while CircleUSD has struggled due to regulatory concerns and banking chaos, highlighting the centralization of wealth in the cryptocurrency industry and concerns over transparency and reserve backing.
The stablecoin market has undergone significant changes since last year. One of the most controversial stablecoins, Tether, has remained relatively unscathed while others have collapsed or lost market share. As of 2023, Tether has grown by 22%, reaching a market cap of $81 billion, while CircleUSD has lost 21% of its market cap. Tether's market share has also increased to 61.5%, its highest in two years, due to the collapse of TerraUSD and the shutdown of BinanceUSD. However, concerns remain about Tether's reserve backing, as well as the centralization of the cryptocurrency industry.
The stablecoin market has been volatile over the past year, with collapses and shutdowns of major stablecoins. In May 2022, TerraUSD collapsed due to its uncollateralized stablecoin model being flawed. In February 2023, BinanceUSD was shut down by regulators, resulting in a significant decline in its market cap. The collapse of TerraUSD and shutdown of BinanceUSD have increased the concentration of the stablecoin market, with Tether being the biggest beneficiary. Tether's market share has grown to 61.5%, its highest mark in two years.
In contrast, CircleUSD has struggled, losing 21% of its market cap. There are two main reasons for this. First, CircleUSD had 8.25% of its reserves in Silicon Valley Bank, which caused its depegging to 88 cents during the banking chaos. Although the US administration guaranteed bank deposits at the fallen Silicon Valley Bank, CircleUSD has not recovered its market cap. Second, CircleUSD is based in the US, where regulators have been cracking down on stablecoins this year. The shutdown of BinanceUSD demonstrated the potential risks for US-based stablecoins. Furthermore, Circle's partner, Coinbase, was recently issued with a Wells notice around the potential violation of securities laws.
Tether, on the other hand, is based in Europe, where regulations are less uncertain. Its market share has grown perceptibly since the start of the year, up to 61.5%, the highest mark in two years. Tether's growth is expected to continue, but concerns persist over its reserves underlying the stablecoin. Moreover, the concentration of wealth in the hands of one stablecoin poses a massive stress point for the entire crypto industry.
The centralization of wealth is a concern for the cryptocurrency industry, which was built on the concept of decentralization. Tether's dominance of the stablecoin market only reinforces the fact that crypto is becoming more centralized. If anything were to happen to Tether, the entire ecosystem would be thrown into chaos, potentially resulting in an existential crisis for the industry as a whole. Even within the "decentralized" area of DeFi, the bulk of activity is through USDT, a stablecoin that can be directly shut down by regulators.
Transparency is also a concern for Tether's growth. While Tether has improved somewhat with the publication of reports, it has still paid fines in the past related to false disclosures. Its standards are far from what one would expect from a publicly listed company. Opaque financials and verbal promises are the norm in crypto, and this is concerning for investors.
In conclusion, the stablecoin market has undergone significant changes over the past year, with Tether emerging as the dominant stablecoin. However, concerns remain about its reserve backing and the centralization of wealth in the cryptocurrency industry. The promise of a decentralized financial system appears to be nothing more than a dream at this point, with the crypto industry becoming more centralized. Transparency and regulation are crucial for the growth and stability of stablecoins and the cryptocurrency industry as a whole.
