The phantom dollar

One of the most significant cryptocurrency companies is Tether (USDT). The hundreds of billions of dollars market capitalisation of USDT makes it more akin to a phantom US dollar, embedded in crypto markets than a speculative asset. Tether provides stability, liquidity and efficient capital flows to traders, exchanges, DeFi protocols and liquidity providers. But due to USDT’s systemic impact and increased regulatory attention, a disruption might have far-reaching ramifications. Tether’s function as crypto trading’s backbone, faces regulatory challenges (such as the US’s GENIUS Act), but what could happen if something goes wrong?

Tether, founded in 2014 as RealCoin, aimed to give cryptocurrency consumers a reliable asset tied to the US dollar. Traditional cryptocurrencies are volatile - thus a stable digital asset has long been in demand. USDT claims to have US dollar reserves, hence each token may be redeemed for $1 in currency. USDT pervades as it works on a variety of blockchains such as Ethereum, Tron, Solana, Avalanche and others, so making it adaptable. Furthermore, because many exchanges designate USDT as the base trading pair for altcoins, it bridges risk assets and fiat whereby allowing traders to exit volatility without accessing USD bank accounts. It serves as collateral, liquidity, medium of exchange, reliable store of value during crises and a key component of automated market makers, lending and borrowing protocols in DeFi.

Tether 17^th largest holder of US treasuries

Source: Paolo Ardoion/X

USDT now owns a significant portion of US Treasury bills beyond daily trade. In October 2025, the CEO of Tether conformed that Tether owns over $135billion of US treasuries. This implies that Tether’s interest in short-term US government debt impacts rates, since the more Tether buys in theory, the more US treasuries are bought and the greater the pressure is for US treasuries to rise in price and so lower yields. Resultant is that USDT acts as a phantom dollar, a digital proxy for USD that facilitates trades, stabilises volatility and serves as collateral 24/7 in different blockchain systems, and is firmly ingrained in global financial infrastructure. Furthermore, USDT’s supremacy has increased regulatory attention. The Guiding and Establishing National Innovation for the US Stablecoins Act (GENIUS Act) was passed in July 2025. This Act legalises payment stablecoins and requires one-to-one cash or short-term US Treasury backing, frequent audits, licensing and more control. In addition, issuers must meet stricter disclosure, reserve and operational transparency criteria; Tether, a major USDT issuer, must reply. In addition, Tether has announced plans for Anchorage Digital Bank to produce USAT, a US stablecoin, under tougher GENIUS laws. This acknowledges that stablecoin issuers must achieve higher standards to operate globally, especially in tight regulatory regimes.

Meanwhile, America does not stand alone. In Europe, the Markets in Crypto-Assets (MiCA) regulation requires stablecoin disclosure, reserve assets and licensing as e-money. To avoid de-listing or service restrictions under MiCA, USDT must meet reserve backing, risk mitigation and transparency requirements. Due to its systemic impact on payment systems, capital flows, financial stability and consumer protection, other governments are exploring or passing stablecoin bills or regulations. However, not every country will follow the US path due to political, legal and financial differences. Some governments may liberalise stablecoin legislation, whilst others may ban it. Moreover, embedding adds danger and dependency. The US economy faces a paradoxical threat: a “demand engine with no reverse gear”. Recent data from the BIS reveals a dangerous asymmetry: whilst inflows suppress yields slightly, outflows spike yields three times harder. The impact is mathematically severe - a 20% contraction in the stablecoin market, triggered by Tether’s recent S&P downgrade due to high-risk Bitcoin reserves could force $60 billion in liquidations. This would trigger a 60-basis point spike in yields, adding $228 billion to annual interest expenses on the $38 trillion national debt. With the Strategic Bitcoin Reserve covering less than 0.08% of the debt, it provides no protection during a crypto crash. This volatility-induced fiscal strain is now providing the Federal Reserve with its strongest justification for reasserting control via a digital dollar, despite the earlier ban on CBDCs.

USDT settles crypto by moving across chains, functioning as a bridge token, transporting assets between exchanges, and “parking” funds during market fluctuations. It supports trading volumes and market efficiency. Furthermore, DeFi protocols, lending platforms, liquidity pools, stablecoin swaps, all integrate USDT. Collateral contracts, margin positions, automated market makers and yield-generating methods presume USDT=USD. If the assumption fails, smart contracts, arbitrageurs or algorithms may fail, causing defaults, liquidations or protocol distrust. The scenario of a USDT collapse (whether due to loss of peg, insolvency of reserves, regulatory seizure or other cause) is speculative but must be treated as a real risk, given USDT’s importance. Market panic may follow collapse and dollar traders may rush to close holdings to manage volatility. Large withdrawals, slippage and trading volume reductions may affect exchanges. Many pricing and value assumptions depend on USDT’s stability, which might lower Bitcoin, Ethereum and altcoin prices. Moreover, exchange liquidity may fall; USDT pairs are popular for volumes. If USDT access is suddenly cut, withdrawals, trading pairs and exchanges could fail. DeFi may be affected by cascades and USDT declines may under-collateralise loans. Automated market makers may misbalance pools and lenders may fail or close; the concept of “stable” collateral would be questioned. Stablecoin confidence would fall system wide, with users potentially preferring fiat-backed stablecoins such as USDC or regulated e-money tokens if other stablecoins are examined more. Thus, stablecoins’ value as a safe-haven in turbulent times would drop - wider financial regulatory systems may tighten, freeze, examine reserves, etc. Institutions and funds heavily exposed to USDT or using stablecoins for settlement or custody may be harmed. Finally, international markets may suffer; USDT provides stability for many consumers in emerging nations with weak currencies. A collapse could afflict customers’ capacity to save, trade and transfer value.

Will other jurisdictions follow the US path?

The GENIUS Act changed US stablecoin regulation, but will other nations implement similar laws? There are drivers and impediments - EU, UK, Singapore, Hong Kong and other jurisdictions with strong financial systems and high regulatory capabilities are already implementing stablecoin frameworks. MiCA mandates stablecoin issuers in the EU to meet reserve, auditing and licensing standards. This resembles several GENIUS Act criteria, but not exactly. Countries with widespread stablecoin use (especially in crypto sectors, remittances and cross-border trade) have more motivation to regulate than outlaw. They may safely integrate stablecoins into their financial systems, safeguard consumers, attract crypto commerce and minimise systemic danger with legislation such as GENIUS. However, rigorous rules may be delayed in some jurisdictions due to:

· limits on regulatory capacity - less developed regulatory organisations may lack resources to examine real-time reserve backing or closely monitor stablecoin issuers.

· financial and political interests - stablecoins operate in regulatory grey markets in various countries; strong regulation could harm business models.

· legal traditions - countries with weaker digital asset laws may proceed slower or adopt various models (e.g. stablecoins may be securities, currencies or payment instruments with different governance).

· competition concerns - a jurisdiction may choose regulatory arbitrage if rigorous regulation drives crypto activity elsewhere.

Thus, whilst many will follow the US model (transparency, reserve backing, licensing), the framework will vary. Some places may have looser or stricter rules; some issue stablecoin licenses, whilst others integrate them within banking/e-money rules. Tether’s supremacy in the stablecoin market highlights stablecoins’ pros and cons. It shows how a privately issued digital dollar-like token can enable speedy global transfers, serve as collateral, act as a “on-ramp/off-ramp” for traditional finance and offer liquidity during market stress. However, its lack of transparency, occasional reserve controversy and outsized power over crypto markets offer possible single points of failure. Stablecoins must be backed by high-quality liquid assets such as cash and Treasuries, and the GENIUS Act requires frequent audits, licensing and oversight to decrease risk. These policies aim to protect customers and financial stability by preventing runs, false reserve claims, money misuse and regulatory arbitrage. Compliance with regulation may require Tether and its customers to keep more conservative reserves (less high yield but safer instruments), pay greater compliance expenses, slow expansion or limit business operations.

Essentially, USDT is more than merely a supply and liquidity provider for the crypto economy - it is foundational. Trade, hedging, arbitrage, cross-border transfers, DeFi activity, and more, are enabled by this blockchain-native US dollar proxy. However, its systemic relevance means that dangers are no longer niche: a Tether collapse or lack of confidence may impact global financial markets. Governments recognise its relevance with the GENIUS Act in the US and MiCA in Europe; they want to protect innovation whilst ensuring stability, openness and accountability. Legal regulatory capability and local economic incentives determine whether other jurisdictions follow the US. Meanwhile Tether is becoming a phantom US dollar. Depending on USDT’s resilience authorities may determine whether it remains a global market leader or becomes a cautionary story of what happens when digital money becomes too central, too trusted - and too unregulated.