Tether (USDT) in the regulatory crosshairs: how reliable is the largest stablecoin?
Tether (USDT) is the largest stablecoin on the cryptocurrency market. It provides stability due to its peg to the U.S. dollar. Its popularity stems from its ability to maintain a 1:1 ratio with the dollar, making it a reliable vehicle for traders and investors looking to avoid the volatility inherent in other cryptocurrencies.
As of February 21, 2025, Tether has a market capitalization of approximately $141.8 billion, underscoring its dominance amongst stablecoins. The daily trading volume of USDT reaches $66.66 billion, reflecting its widespread use in cryptocurrency transactions.
Regulatory investigations surrounding Tether
Since its launch in 2014, Tether has faced various legal and regulatory challenges. In 2019, the New York State Attorney General's Office (NYAG) filed a lawsuit against iFinex Inc., the operator of Tether and crypto exchange Bitfinex, accusing them of hiding an $850 million loss and using Tether reserves to cover that shortfall. In 2021, the case was settled: the companies agreed to pay an $18.5 million fine without admitting guilt.
In October 2021, the U.S. Commodity Futures Trading Commission (CFTC) fined Tether $41 million for falsely claiming that USDT was fully backed by fiat currency. The investigation revealed that from 2016 to 2018, Tether did not always have sufficient reserves to cover all tokens issued.
In October 2024, The Wall Street Journal (WSJ) reported that U.S. federal authorities investigated Tether for allegedly violating anti-money laundering and sanctions evasion laws. The Manhattan District Attorney's Office is investigating whether USDT was used by third parties to finance illegal activities such as drug trafficking, terrorism, hacking, or laundering the proceeds of these crimes.
In addition, the U.S. Treasury Department is considering imposing sanctions against Tether due to the widespread use of USDT by individuals and organizations under U.S. sanctions, including terrorist organizations and arms dealers. Such sanctions could prohibit U.S. citizens from doing business with Tether.
In response to the allegations, Tether's CEO, Paolo Ardoino, said that the company does not indicate that it is under investigation. He called the WSJ's allegations "irresponsible" based on rumors, emphasizing that Tether cooperates with law enforcement to combat illegal activity.
As of February 21, 2025, there have been no official statements from the U.S. Department of Justice or the U.S. Treasury Department regarding the investigation's outcome. Tether continues to operate, stating that it complies with all applicable laws and actively cooperates with international law enforcement agencies.
Transparency of Tether (USDT) reserves
Investors and regulators have long questioned the transparency of Tether's reserves. Initially, the company claimed that every USDT issued was fully backed by U.S. dollars in bank accounts. However, in 2019, Tether changed this policy, stating that reserves can include cash, other assets, and debt.
In 2021, the company released a report stating that only 2.9% of reserves were cash, with the majority being commercial paper and other assets. This raised further questions about the liquidity and reliability of the reserves. In response to the criticism, Tether announced that it was reducing the proportion of commercial paper in its reserves, and in October 2022, announced that it was abandoning them altogether in favor of U.S. Treasury bonds.
In January 2024, Cantor Fitzgerald's CEO, Howard Lutnick, stated that his company is the custodian of Tether reserves and confirmed that it has approximately $86 billion in assets to back the USDT issued.
Howard Lutnick noted that Cantor Fitzgerald manages a significant portion of these reserves invested in U.S. Treasuries. He said this helps increase demand for U.S. government bonds, which is good for the U.S. economy. Latnick also expressed optimism about developing real-world assets (RWAs) over the next ten years.
However, the lack of a meaningful independent audit continues to raise concerns about the transparency and reliability of reserves.
Potential risks to the market
Tether's dominant position in the stablecoin market makes it a potential source of systemic risk to the cryptocurrency ecosystem. With a market capitalization of $141.8 billion, USDT holds about 63% of the entire $230 billion stackcoin market. Any doubts about USDT's security or liquidity could lead to massive sell-offs, which have the potential to cause significant volatility in the market.
In January 2025, the European Securities and Markets Authority (ESMA) began enforcing MiCA regulations, requiring issuers of stablecoins to comply with the new standards.
Markets in Crypto-Assets (MiCA) is a European Union regulatory framework for the crypto asset market. It aims to create uniform rules for crypto asset issuers and related service providers, protect investors and consumers, and promote transparency and stability in the crypto industry.
Tether and some other stablecoins that have not received ESMA approval have been required to cease operations in the EU, leading to the delisting of USDT on several European exchanges (e.g., Crypto.com). If the bans spread, market participants must look for alternative instruments for stable settlement.
In the face of growing pressure, investors are advised to diversify portfolios, consider the risks associated with using USDT, and monitor the regulators' decisions, as their further steps may significantly affect the future of stablecoins and the entire crypto economy.