Challenging the USD’s Hegemony, Championing CBDC and Beyond

In 2008, a momentous occasion took place with the release of the Bitcoin (BTC) white paper. With author Satoshi Nakamoto explicitly calling for the deconstruction of financial intermediaries, regulators around the world were put on alert, particularly as Wall Street faced one of its biggest crises since the 1930s. While Bitcoin’s lack of a stable pricing mechanism has prevented it from becoming a commonly accepted medium of exchange, Tether (USDT) — one of the earliest stablecoins, developed by Tether Ltd. — has addressed this.

In 2014, Tether Ltd. issued its namesake stablecoin, Tether. As the earliest U.S. dollar-backed stablecoin, Tether has claimed that each unit of USDT is 100% backed by its dollar reserves. After China cracked down on crypto exchanges in 2017, traders encountered difficulties when trading crypto assets with fiat currencies. Thus, Tether was initially used as a value exchange vehicle. However, Tether became the most accessible entry point for traders after China further tightened its cryptocurrency ban that year, thus driving rapid growth in one of the key assets in the cryptocurrency market.

Recently, Tether has come under intense scrutiny from traditional financial institutions and regulators that believe it could threaten the U.S. dollar’s hegemony due to accelerating mass adoption of USDT for cross-border remittance, payment and settlement, foreign exchange, and payroll.

Tether has surpassed its original application, going from a quote currency in crypto-asset trading into an alternative currency capable of facilitating cross-border remittance and payment settlements.

As of 2019, approximately $212 billion of funds was transferred or settled through USDT. In short, despite its short history and relatively low market penetration, Tether has already created alternate currency markets divorced from traditional monetary and financial systems.

More significantly, USDT is increasingly flowing to dollar-inaccessible areas. In short, it effectively functions as a more efficient and flexible form of the dollar. Moreover, as a distributed network, Tether operates outside the purview of the U.S. banking system and centralized monetary policy. As its penetration increases, authorities are increasingly viewing Tether as a threat to the dollar’s hegemony.

The U.S. Federal Reserve leverages the dollar in two ways to maintain hegemony. First, it leverages the dollar’s status as the dominant global currency to influence global monetary policy. Second, it is able to control the flow and circulation of the dollar through the U.S.-controlled global payment and settlement systems, namely SWIFT, Visa and Mastercard.

Since World War II, the U.S. has played a leading role in terms of shaping the global monetary system. Thanks to the dollar’s hegemony, it has been able to maintain a dominant position within the financial system while also driving economic growth. As such, the U.S. Federal Reserves’ monetary policy directly impacts global monetary, financial and trade markets.

For example, by leveraging its balance sheet, the Federal Reserve is able to periodically recover foreign-owned dollars and debt to improve trade competitiveness. Moreover, the dominance of SWIFT around the world further enhances the Federal Reserves’ control over the flow and circulation of dollars as well as American dominance.

Through the SWIFT network, the U.S. possesses the ability to block international settlements by other countries — a move that strikes a major blow to sanctioned countries.

As an audit-resistant form of currency, Tether disrupts U.S. control over dollar circulation while weakening the Fed’s monetary policy influence.

Given that the current monetary paradigm is predicated on centralized control, Tether represents a threat to the Federal Reserves’ control and influence. As a form of currency independent of the dollar, it has created a new distributed system that threatens to replace the traditional banking system. Moreover, as Tether’s network is unaffected by the Fed’s tightening and easing policy of the dollar, it also represents a threat to U.S. influence vis-a-vis dollar hegemony.

Moreover, Tether is also capable of circumventing the SWIFT system by creating a decentralized system that can penetrate either sanctioned or underserved regions. Leveraging blockchain’s trustless nature, Tether can deliver enhanced efficiency while removing human risks — as well as the central banking and payment system. In short, Tether’s existence represents a threat to the relevance and power of centralized banking systems.

Users of Tether are either unable to or unwilling to access U.S. dollar services through compliant financial channels. Regardless, users are willing to shoulder a higher cost when compared to the dollar. This premium is derived from channel fees paid by end users to minters through fiat channels.

Further showcasing Tether’s impact on the Federal Reserve’s control, it has opened…

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