- At the start of 2021, USDC was a fifth of the size of Tether. Now it's two-thirds as big -- and it's still taking market share.
- Tether has faced controversy over the way it keeps its reserves, sparking fears it may not be able to support a run on USDT.
- USDC has also come under fire, but moved quickly to build trust.
USDC is quickly gaining market share.
Tether (USDT) and USD Coin (USDC) are the two biggest stablecoins in the industry. A year ago, first-mover Tether was unquestionably the market leader. But USD Coin is catching up and growing much faster than Tether. Notably, last month it overtook Tether on the Ethereum network.
Stablecoins exist on various smart contract blockchains, including Ethereum (ETH), Avalanche (AVAX), Solana (SOL), Algorand (ALGO), and others. These cryptos tie their value to other commodities, such as the U.S. dollar or gold. For example, both USDT and USDC are pegged to the U.S. dollar.
Market share of USDT and USDC
|Jan. 1, 2021||$21.1 billion||$4.0 billion|
|Jan. 1, 2022||$78.4 billion||$42.5 billion|
|Feb. 16, 2022||$78.7 billion||$52.6 billion|
The table above shows that USD Coin's market cap is up over $10 billion since the start of the year, while USDT has barely grown at all. At the start of 2021, USDC was about a fifth of the size of Tether, and now it's about two-thirds its size. That's a big increase in a relatively short period of time.
Why USDC is gaining market share
Tether has been in hot water with several different authorities. Last year the New York Attorney General's office said it had lied about its assets and it paid $18.5 million in fines. The CFTC also fined it $41 million, and Bloomberg reports the Department of Justice may pursue criminal proceedings.
The crux of the matter is that people are concerned Tether doesn't have enough cash in reserve to support all the tokens it's issued. Fiat-backed stablecoins like Tether and USDC should have $1 in reserve for every token that's issued. The trouble? If there was a run on Tether -- everybody decided to withdraw their USDT -- it isn't clear whether Tether could meet those obligations.
Tether says it can support its tokens and denies any wrongdoing. But journalists, regulators, and investors aren't so sure. Tether's most recent report said 10% of its assets were in cash and bank deposits. It holds almost half its reserves in commercial paper, a type of unsecured short-term debt. Tether's critics want to know who it has loaned money to, and how risky those loans are.
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USDC has also come under fire for a lack of transparency about its reserves. It initially held funds only in FDIC-insured banks, but then put cash into what it called "approved investments." However, USDC responded to the criticism by committing to hold its USDC reserve "entirely in cash and short-duration U.S. Treasuries." USDC is also audited by Grant Thornton, a top five accounting firm. Tether's auditor is Cayman-Islands-based accountant, Moore Cayman.
What the USDT-USDC race means for investors
Stablecoin regulation is coming. With billions of dollars at stake, lawmakers believe Tether is similar to a bank -- and it should follow bank-like rules in terms of how it handles investors' money.
USDC and other fiat-backed stablecoins like Gemini's stablecoin, GUSD, already boast of their regulator-friendly approaches. And given the questions over Tether's reserves, it is likely to be hardest hit by new regulations. But nothing will happen quickly. Regulation takes time. It isn't as if authorities will bring in rules that hamper Tether's operations at the drop of a hat.
Right now, Tether is the third biggest cryptocurrency by market cap. The worst case scenario for crypto would be the collapse of Tether while it's still top dog. Not only could that impact the crypto industry, it would also have ramifications for the wider economy.
The best case scenarios are that Tether proves it can support the $78.7 billion USDT it has issued, or that investors gradually move their money out of Tether and into a more transparent stablecoin. One challenge here is that Tether is a common trading pair on several crypto exchanges, forcing investors to continue to use it.
That said, there's a good chance USDC can overtake Tether this year, especially if it continues to grow at the same rate. If this happens, it would partially stabilize a shaky foundation of the industry and reduce the risk to investors.
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Emma Newbery owns Ethereum, Avalanche, Solana, Algorand, and USD Coin. The Motley Fool owns shares of and recommends Bitcoin.
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