The money printer has gone quiet.

The parabolic growth in the market cap of stablecoin giant tether (USDT) suddenly came to a grinding halt at the end of May, just as bitcoin’s price was coming off its all-time highs. With bitcoin trading in a range of roughly between $30,000 and $40,000 ever since, a new round of chatter has been circulating linking the two events and echoing an old conjecture: Did Tether stop pumping up the price of bitcoin?

USDT's market cap vs. bitcoin's price
Source: Glassnode

According to analysts and market participants who spoke to CoinDesk, however, the sudden pause of tether printing has instead revealed that the most traded cryptocurrency in the world is seeing its dominance threatened by three unprecedented challenges combining in a perfect storm to rattle the stablecoin: Trouble in its biggest geographic market has made it hard for traders there to buy USDT with fiat. One of USDT’s most promising competitors appears to be gaining market share. And regulatory pressure around the world is increasing.

An executive from Tether, while acknowledging the demand for USDT has fallen, argued that the trend is not exclusive to the token.

“Demand for tether ebbs and flows, and has been impacted by lower demand in recent weeks,” Paolo Ardoino, chief technology officer at Tether, said in a written response via a spokesperson, noting that USDT is not the only stablecoin that has seen reduced demand.

China’s crackdown on crypto

The crypto crackdown in China – both on bitcoin mining and trading – has hurt bitcoin’s prices, which are now down by 52% to around $31,000 from their all-time high at $64,928.14 in April.

But another victim of China’s renewed crypto crackdown is USDT, the stablecoin whose success can be largely attributed to its dominance among Chinese traders and investors. They routinely use the dollar-pegged stablecoin as an on-ramp to crypto markets through over-the-counter (OTC) brokers because fiat-to-crypto trading or buying digital assets with government-issued cash remains illegal in the country. 

Last month, Chinese police arrested more than 1,000 people on money-laundering charges, alleging they used crypto to help them evade the law. Such action against OTC merchants may help explain why USDT’s growth has slowed significantly in China.

“It is extremely difficult to [go] on and off ramp in China [to crypto,]” Annabelle Huang, a partner at Hong Kong-based crypto asset manager Amber Group, said. “A lot of the OTC merchants have stopped deals.”

With bitcoin struggling to move above its current range of $30,000-$35,000, there is also no incentive for new cash in China to enter the crypto market.

“Tether’s market in Asia is mostly through OTC merchants, and with less cash going into the market, there is less demand for tether,” Rachel Lin, former vice president and founding partner at Singapore-based crypto investment firm Matrixport, said.

Hong Kong-based crypto lender Babel recently told CoinDesk that it cut its interest rates for USDT deposits because of weak demand for the stablecoin.

A spokesperson for Babel, however, would not say why demand has decreased recently.

It seems China’s crackdown on crypto-related money-laundering activities remains ongoing.  A report from South China Morning Post late Wednesday says that Hong Kong customs has shut down a local money-laundering syndicate that used crypto – specifically USDT – to process illegal funds worth about $155 million, the first crackdown of its kind in the city.

The news in Hong Kong “could pressure any Singapore and Hong Kong desks to reconsider trading USDT/USD [pairs],” Dan Burke, managing director of institutional sales in Asia-Pacific at BitGo, a custodian of digital assets, said.

USDC on the rise

While demand for USDT appears to have dried, the rising star of the stablecoin market is increasingly USDC, another dollar-pegged stablecoin powered by crypto financial services firm Circle.

Boston-based Circle recently announced its plan to go public using a special purpose acquisition company (SPAC), not long after it revealed its goal to expand USDC to at most 10 more blockchains outside Ethereum. 

Tron, a blockchain helmed by crypto influencer Justin Sun, is among the blockchains that recently started supporting USDC, and according to Circle’s website; one of the goals of doing so is “enabling [USDC] growth in Asia and around the globe.”

As it stands, there is more USDT on Tron than on Ethereum as traders in Asia favor blockchains that provide faster and cheaper transactions. That makes USDC’s entry to Tron a more enticing proposition. 

“I think USDC has a chance to compete in the stablecoin market in Asia against tether,” Sun told CoinDesk. “I feel like right now the stablecoin market in Asia is in need of a diversified infrastructure and clients in Asia are looking for more stablecoin options.”

According to Lin, unlike USDT, which is largely relying on the OTC channel, USDC can be easily purchased by investors in Asia thanks to the human-intensive customer service offered by Circle, the company that operates the stablecoin business.

“Doing business with USDC is very upfront,” Lin said. “They usually have a manager to work with you by email communications once you submit the required documents.”

It may be too early to conclude whether USDC can beat USDT’s dominance in Asia, but USDC is already winning in another white-hot sector in crypto: decentralized finance.

Nearly 50% of USDC supply is currently locked in smart contracts compared with tether’s 20%, according to data from Glassnode.

The percentage of supply in smart contracts of USDT vs. USDC
Source: Glassnode

“USDC is increasingly being used for on-chain and payments use cases, which continue to grow,” Ryan Watkins, a research analyst at Messari, said. “Whereas USDT is primarily used for inter-exchange settlement and margin for derivatives, use cases which have pulled back as the market has calmed.”

Crypto bears vs. tether’s vulnerability

One of the lingering problems of USDT – its reputation within the crypto community – is a third obstacle the world’s largest stablecoin by asset size is facing. 

“The market is infused with bearish sentiment and traders are looking for a reason,” said Noelle Acheson, head of market insights at crypto prime broker Genesis Global Trading. “It’s FUD (fear, uncertainty and doubt) season, and tether’s vulnerabilities are almost always a part of that conversation.”

According to Acheson, the market is “starved” for explanations about why the price is so “listless” and USDT is a perfect target as long as the company behind the dollar-pegged stablecoin remains murky about its reserves. (Genesis is a subsidiary of Digital Currency Group, which also owns CoinDesk.)

More questions have been raised recently by regulators and governments around the world about USDT and other stablecoins. Testifying before the U.S.. House of Representatives’ Committee on Financial Services Wednesday, Federal Reserve Chairman Jerome Powell addressed a question from Rep. Anthony Gonzalez (R-OH) about Tether’s assets,  which, according to its disclosure in May, was nearly half made up of unspecified commercial paper.

“Commercial papers are short-term overnight obligations from companies, and most of the time they’re investment grade, most of the time they’re very liquid, it’s all good,” Powell said. But in the face of crises, “the market just disappears. And that’s when people will want their money. It’s very simple: These are economic activities very similar to bank deposits and money market funds, and they need to be regulated in comparable ways.”

Some of that bearish sentiment infused with regulatory concerns is reflected in the growth of the USDC/USDT trading pair on the Binance exchange. The trading pair is currently the most active one in the spot market to include the USDC stablecoin. In other words, Binance’s traders are swapping between USDC and USDT, potentially for a bet that USDT’s price will go down or at least because they find more utility in USDC

Some traders could be “borrowing USDT and swapping for USDC,” said Hassan Bassiri, vice president at Los Angeles-based asset management firm Arca. “You know USDC is worth $1, so you borrow USDT by swapping for USDC. If USDT isn’t fully backed, you can use USDC to buy back the USDT at a price lower than $1.”

To be sure, a counter-narrative for the increased trading volume in the USDC/USDT pair on Binance is that many small-cap tokens available on Binance only have trading pairs with USDT, said Lin, the ex-Matrixport VP.

Indeed, AXS, the latest hot token from Axie Infinity that hit a record high Wednesday, is available on Binance with trading pairs with USDT, Binance USD (BUSD) and BNB, according to CoinGecko, while there are almost no AXS/USDC trading pairs available on centralized exchanges. The trading pair of USDC/BUSD is another popular trading pair on Binance involving USDC; it is just behind USDC/USDT, BTC/USDC, and ETH/USDC by trading volume in the past 24 hours.

If traders are shorting USDT, they are doing so in response to FUD, Bassiri said. However, he dismissed concerns around the stablecoin. 

“USDT is fine [and has] always been fine,” he said.

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