Can the U.S. Government Kill USDT?

Introduction

Tether (USDT) is the world’s largest stablecoin. Designed to maintain a 1:1 peg with the U.S. Dollar and backed primarily by U.S. Treasuries and cash equivalents, USDT provides liquidity and stability, making it a core asset across both centralized and decentralized platforms.

However, as USDT’s influence has grown, so has regulatory scrutiny. With over $97 billion in U.S. Treasury bonds as reserve assets, Tether now ranks among the largest holders of U.S. debt. This reliance on U.S. financial assets means it could face unique pressures if U.S. authorities decided to target Tether, especially as calls for stablecoin regulation intensify. Whether the U.S. government can effectively “kill” USDT by restricting its access to financial resources or platforms raises complex considerations.

This article explores the mechanisms by which the U.S. government might seek to regulate or restrict Tether, the potential impacts on USDT’s operations.

Understanding Tether’s Reserve and U.S. Treasury Holdings

Tether (USDT) is primarily backed by U.S. Treasuries and other cash equivalents, making its reserve structure deeply tied to the stability and liquidity provided by the U.S. financial system. As of recent reports, U.S. Treasuries make up over 80% of Tether’s reserves, amounting to approximately $97.6 billion, positioning Tether as one of the largest individual holders of U.S. government debt—more than many countries, including Germany and the UAE. This large reserve pool enables Tether to maintain liquidity, facilitating seamless redemption of USDT into fiat currencies when necessary. Additionally, Tether holds smaller portions of its reserves in assets like cash, Bitcoin, and gold, providing a level of diversification while still relying heavily on Treasuries.

The U.S. government’s direct control over Treasury bonds could be a vulnerability for Tether if regulatory bodies imposed restrictions. For instance, should the U.S. government move to block Tether’s access to U.S. Treasuries, it could challenge Tether’s ability to maintain its reserves structure, forcing the company to rely on non-U.S. assets or assets with different liquidity profiles. While Tether could theoretically pivot to other high-liquidity assets, it would need to find assets with similar stability, yield, and accessibility to avoid undermining confidence in USDT’s dollar peg.

According to Tether CEO Paolo Ardoino, most of Tether's U.S. Treasuries are custodied by Wall Street company Cantor Fitzgerald. However, wherever the U.S. Treasury Bonds are held, they are actually ultimately held in the Federal Reserve account.

Whenever you hold U.S. Treasury Bills—whether through a bank, brokerage, or money market fund—the ultimate custody of these T-Bills resides in accounts managed by the U.S. Federal Reserve. The Fed acts as the central clearing and record-keeping authority for U.S. government securities, maintaining the official record of ownership through its Treasury Direct system. Financial institutions serve as intermediaries, holding securities on behalf of investors and reflecting ownership in individual accounts.

This heavy reliance on U.S. Treasuries also means that any disruptions in the U.S. financial markets—such as sharp fluctuations in Treasury yields or geopolitical factors affecting dollar assets—could directly impact Tether’s reserve value and, consequently, USDT’s stability.

Tether has also reportedly built up an excess reserve cushion exceeding $5 billion, aimed at buffering against unforeseen volatility or regulatory shifts. This surplus serves to mitigate risks and maintain Tether’s solvency in times of market uncertainty, helping it retain the liquidity essential to its role in the crypto ecosystem.

Potential Regulatory Measures Against Tether

If the U.S. government were to target Tether, it could pursue various regulatory actions, each impacting Tether’s operations, market liquidity, and access to U.S.-based financial services. Here, we explore several plausible measures the U.S. might adopt and their potential impact on USDT and its users.

Sanctions on Tether’s Core Operations

The U.S. could attempt to place sanctions directly on Tether’s parent company, Tether Holdings Limited. Though based in the British Virgin Islands, Tether still relies heavily on access to U.S. dollar reserves and interactions with U.S. linked financial institutions. Sanctions targeting these interactions could restrict Tether’s ability to maintain USD-backed reserves, weakening confidence in USDT’s dollar peg.

Regulatory bodies like the U.S. Treasury and the Office of Foreign Assets Control (OFAC) have previously sanctioned foreign entities with U.S.-linked operations or dollar-based transactions, indicating they have the means to impact Tether if they perceive it as a risk to financial stability or regulatory compliance.

Restrictions on U.S.-Based Exchanges

Another avenue is pressuring U.S.-based cryptocurrency exchanges to delist USDT, similar to actions taken against other tokens considered securities. If exchanges such as Coinbase and Kraken are prohibited from listing or facilitating USDT transactions, this would significantly reduce liquidity within the U.S. market, making it harder for U.S. traders to access USDT.

While USDT’s global presence would likely allow it to survive outside U.S. borders, the loss of major exchange listings in the U.S. would disrupt its dominance. This might shift demand toward other stablecoins like USDC, which is already structured with strong regulatory compliance.

USDT is currently facing delisting pressures from major exchanges in Europe due to the new MiCA (Markets in Crypto-Assets) regulation. If similar delistings were to occur in the U.S., USDT’s global market position could be significantly impacted, reducing its accessibility and potentially shifting demand toward more compliant stablecoins.

Source: CryptoSlate

Targeting Tether’s Reserve Assets and Banking Partnerships

Given Tether’s heavy reliance on U.S. Treasuries, the U.S. government could restrict Tether’s access to Treasury markets, potentially blocking its ability to acquire new U.S. bonds. This would require Tether to restructure its reserves, relying on assets with different risk and liquidity profiles, such as foreign government bonds or other liquid assets.

Additionally, the U.S. could pressure banks and financial institutions globally to limit partnerships with Tether, making it difficult for the company to manage dollar reserves effectively. Such measures would introduce operational challenges, particularly in maintaining sufficient reserves to back USDT in a highly liquid manner.

How Tether Could Adapt?

If the U.S. government were to impose sanctions or restrictions on Tether, several adaptations and strategies could help Tether maintain its operations and stabilize USDT.

Reserve Diversification: Shifting Away from U.S. Treasuries to Bitcoin and Gold

Given Tether’s significant reliance on U.S. Treasuries, any direct restrictions on holding these assets would necessitate a shift toward diversified reserves. Tether has identified alternatives that include foreign government bonds, Bitcoin, and gold. Recently, Tether has actively expanded its reserve diversification by incorporating both Bitcoin and gold into its portfolio. To date, Tether holds over 82,000 Bitcoin (valued at approximately $5.58 billion) as part of its reserve assets. Additionally, it holds 48.3 tons of gold, valued around $3.87 billion, further bolstering its reserve diversification.

This strategy, which combines digital assets like Bitcoin with traditional commodities such as gold, is intended to create a robust safety net against fluctuations in both financial markets and the crypto sector.

Tether plans to continue this diversification by allocating 15% of its profits towards regular Bitcoin purchases, further increasing its holdings over time.

Expanding Banking and Custodial Partnerships Internationally

Tether’s ability to maintain its dollar peg relies heavily on reliable banking partners for reserve management. If the U.S. government pressures domestic or international banks to sever ties with Tether, it may push Tether to work with institutions in jurisdictions less influenced by U.S. regulations.

New partnerships would likely come with adjustments in reserve transparency and compliance practices, particularly if non-U.S. banks require different regulatory disclosures. By broadening its banking network, Tether could continue operating with minimal disruption, albeit potentially at a higher operational cost due to international compliance requirements.

Strengthening Compliance and Transparency Initiatives

Tether has already made strides in transparency, conducting regular attestations and quarterly reports audited by BDO, a global accounting firm. Expanding these disclosures or enhancing transparency around reserve details could build further confidence among users, investors, and regulators, demonstrating Tether’s commitment to stability. Additional disclosures, such as daily reserve breakdowns or live updates on reserve assets, might further alleviate regulatory concerns.

Conclusion

In conclusion, while U.S. regulatory actions could significantly disrupt Tether’s current operations, the company’s global positioning and adaptability provide it with options to navigate these challenges. By diversifying reserves, expanding banking partnerships, and enhancing compliance efforts, Tether can potentially sustain USDT’s stability and accessibility even under increased scrutiny. These adaptations would not only shape Tether’s future but could also have lasting effects on the broader stablecoin market, encouraging more compliant, transparent, and resilient solutions.