A stablecoin giant, Tether, has been quietly impacting the price of money by investing heavily in U.S. national debt. This is changing the dynamics of the U.S. debt market and raising questions about the future of global finance.
Tether's Investment in US Debt
Tether has purchased \$9.85 billion in U.S. debt, making it a significant player alongside central banks and major financial institutions. Tether primarily invests in short-term U.S. bonds (90-180 days), which directly influence global short-term interest rate standards. These short-term rates affect various aspects of personal finance, including mortgage rates and corporate financing costs.
The Fed's Concerns
The U.S. Federal Reserve acknowledged the potential impact of large, non-bank institutions like stablecoin issuers on short-term interest rates in their May 2025 financial stability report. Tether's influence is becoming increasingly difficult to manage, as its investment volume approaches the foreign exchange reserves of medium-sized economies.
How Tether Impacts Global Interest Rates
Tether's actions have implications for the interest rates affecting our wallets. Its investment in short-term debt lowers those interest rates, which subsequently influences bank loan costs.
The Logic Chain:
- Tether buys short-term debt: This increases demand, raising the price of the bonds and lowering their yields (interest rates).
- Lower short-term debt interest rates affect bank costs: Banks often borrow money by trading short-term debt. Lower interest rates reduce their borrowing costs.
- Reduced bank costs influence loan prices: Banks may then be more willing to lend money at lower interest rates, potentially impacting mortgages, credit cards, and car loans.
Potential Benefits and Concerns
Lower short-term national debt interest rates can translate to lower mortgage and credit card interest rates for consumers. However, the long-term impact of Tether's activities is uncertain.
The Hidden Impacts of Tether's Operations
While Tether's actions may seem beneficial on the surface, there are potential downsides.
Negative Consequences:
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Compressed bank profits: Lower interest rates on short-term debt squeeze banks' profit margins.
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Difficulty securing loans: Banks become more cautious and may tighten lending standards for small and medium-sized businesses and individuals, making it harder to get loans for things like home improvements or new businesses.
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Illiquidity in the bond market: Tether's long-term holding of bonds reduces market liquidity, making it harder to adjust interest rates quickly when needed.
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Ineffective Fed policy: The Federal Reserve's attempts to influence the market may be undermined by Tether's large holdings, leading to a disconnect between policy announcements and actual market responses.
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Increased dollar value: As Tether buys US dollars to invest in US debt, the value of the dollar is increased, meaning overseas goods become more expensive.
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Disturbed inflation control: With Tether not participating in the traditional banking cycle, the Federal Reserve's tools for controlling inflation may be impacted.
Lack of Regulation
Tether operates outside traditional financial regulations, lacking capital supervision, central bank support, and audits from major accounting firms. This raises concerns about its stability and potential risks to the financial system if it were to collapse.
Regulatory Challenges and Potential Solutions
The U.S. government faces challenges in regulating Tether due to legal loopholes and a lack of clear authority. Current laws don't limit how much U.S. debt Tether can purchase.
The GENIUS Act
The GENIUS Act, recently passed by the U.S. Congress, aims to impose some regulatory oversight on stablecoin issuers. It focuses on:
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Disclosure of reserve asset names.
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Public audits.
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A 24-hour return window for stablecoins.
However, this act doesn't address the issue of how much U.S. debt Tether can hold.
Systemic Risk Warning
The U.S. Treasury Department has issued a systemic risk warning, acknowledging the potential impact of stablecoins on monetary policy stability. Deputy Minister of Finance Wally Adeyemo stated that the United Nations may need to re-evaluate the entire monetary statement mechanism if stable currencies continue to expand as short-term U.S. debt buyers.
Impact on Ordinary People
Tether's actions have implications for everyday consumers, even if they don't directly use stablecoins.
Three Key Impacts:
- Higher Mortgage Rates: Banks are afraid of increasing their profits, which means the loan process has additional scrutiny.
- More Expensive Overseas Goods: The US dollar becomes more expensive, which means overseas goods rise.
- Uncontrolled Inflation: Money will not be added and inflation will not decrease.
The Limit of Tether: A Potential "Gray Rhino"
Tether's current state raises the question of whether it could become a "gray rhino" – a highly probable, high-impact threat that is often ignored.
Conditions for a Potential Collapse
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Tether's assets have surpassed \$11 billion, mostly in short-term US debt.
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It operates without joint support, insurance, or clear regulations.
Under extreme circumstances, this could lead to a non-official gray rhino event.
Potential Consequences of a Collapse:
- Sharp Fluctuations in Cryptocurrency Prices: Bitcoin, Ethereum, and other mainstream currencies could experience dramatic price swings, affecting global financial asset pricing.
- Instability in the U.S. Bond Market: A large-scale sell-off could disrupt the short-term stability curve and hinder central bank policy tools.
- Investment Platform Failures: Exchanges, wallets, and financial platforms could experience a series of failures, leading to a collapse of trust in the global financial digital system.
A Private Central Bank?
U.S. Federal Reserve Vice Chairman Michael Barr has warned that large-scale stable currency issuers operate on the borderline of traditional banking and private human banking. Without limits, Tether is not just a currency; it is a private central bank, raising concerns about the unregulated printing of dollars.
Navigating the New Financial Landscape
Given Tether's influence and potential risks, it's important to adapt your financial thinking and strategies.
Three Tips:
- Follow Policy: Stay informed about financial regulations and potential changes.
- Invest for the Long Term: Focus on long-term investments and consider diversifying your portfolio with assets like anti-transition debt, TIPS, or domestic REITs.
- Avoid High-Risk Financial Products: Be wary of financial products offering unusually high returns, as they may be unsustainable or carry hidden risks.
The rise of stablecoins like Tether is reshaping the global financial system. By understanding the potential impacts and adapting our financial strategies, we can navigate this new landscape and protect our financial well-being.
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