Coinbase calls for switch from Tether to USDC

USD Coin (USDC) is a collateralized USD stablecoin issued by Circle in partnership with Coinbase, while USDT issuance is handled by Tether. 

It is the second-largest stablecoin in the world by market capitalization, and the third-largest by trading volume. 

Yesterday Coinbase suggested on its official blog to stop using Tether, or USDT, and to start using USDC instead. 

Something similar had also been done a few weeks ago by Binance with its BUSD, i.e., the third stablecoin by market capitalization, and the second by trading volume.

Coinbase’s request: USDC instead of Tether

Coinbase on its blog writes that stability and confidence are of utmost importance to clients at this time, specifically citing stablecoins collateralized in fiat currencies as assets that provide clients with stability and confidence during periods of volatility. 

They add, however, that the events of the past few weeks have tested some stablecoins so much that there would be “a flight to safety.” 

They may be referring precisely to the reduction in the market capitalization of USDT, or Tether dollar. 

In fact, from Nov. 10 to Nov. 24 the latter dropped from $69 billion to $65 billion in two weeks. 

Something similar, though on a larger scale, had happened between May and June, after the implosion of the Earth/Moon ecosystem and in particular the UST algorithmic stablecoin. 

From May 10 to July 16, USDT’s market capitalization fell from $83 billion to $65 billion in just over two months. 

Then between August and November, it rebounded to 69 billion only to fall again to 65 billion around mid-November. 

According to Coinbase, USD Coin (USDC) is a reliable and reputable stablecoin, so much so that they have decided to encourage USDT to USDC conversions by eliminating retail customer fees for such conversions. 

They add: 

“At Coinbase, we’re focused on stability and trust. Today’s announcement represents one step on that journey – enabling global customers to convert USDT to USDC with no fees” 

Tether (USDT)

Tether has not commented for now, just as it did not react when Binance decided to convince its users to use BUSD instead of USDT. 

On the other hand, USDT by usage is clearly the market leader, so much so that even combining USDC and BUSD does not achieve a similar volume of usage. 

Suffice it to say that in the last 24 hours, USDT’s trading volumes on the crypto markets were nearly $28 billion, while BUSD’s were only $6.5 billion, and USDC’s were even just over $2 billion. Adding up the volumes of BUSD and USDC does not add up to a third of those of USDT. 

The reason why the two significant declines in USDT’s market capitalization occurred during 2022 is not due to price changes, always stable around $1, but to USDT’s returns. 

In fact, anyone who owns USDT tokens can return them by receiving in return an equal amount of USD (U.S. dollars) minus the fees that must be paid to make the transaction. 

Thus, if the market capitalization is reduced, it means that USDT tokens were taken off the market by Tether because they were returned to them by some USDT holders who wanted to exchange them back into original dollars. 

The capitalization of USDC

In some ways even more interesting is the dynamics of USDC’s market capitalization, due to basically the same logic. 

From March to May of this year it had dropped from $53.5 billion to $48.5 billion. With the implosion of UST, and the flight from USDT, it had risen again at the end of June to $56 billion, but as of mid-July, it had begun to fall again. 

By early November it had even fallen to 42 billion, which was less than the level of early May. At that point, thanks to the new flight from USDT, it had rebounded to nearly 45 billion by the end of November. Now it is just under 43 billion, which is not far above the low peak in early November.

This is most likely the real reason why Coinbase is trying to promote USDC against USDT. 

The fact is, however, that many prefer USDT because it allows for greater anonymity on average. 

Circle is a fully regulated U.S. financial company, so it is not easy to use USDC not truly anonymously. Instead, with a few tricks, a slightly higher level of anonymity can be achieved with USDT, and this is perhaps enough to make many prefer it to USDC. 

Binance (BUSD)

Binance USD (BUSD), throughout 2022 has grown in terms of market capitalization. 

The first growth occurred at the turn of January and February, and then remained almost fixed between $17 billion and $18 billion until mid-August. 

At that point the second period of growth began, culminating in the all-time high of $23.5 billion touched in mid-November. 

It now capitalizes about $22 billion, which is almost double what it was at the end of 2020. 

The second period of growth was mainly supported by Binance’s decision to convert USDP, TUSD, and USDC to BUSD to facilitate their use on its platform. 

Although Binance is the largest crypto exchange in the world, this was not even enough to bring USDT closer. 

Indeed, it should not be forgotten that USDT is by far the most traded token on the crypto markets, with $27 billion per day, even more than BTC with $23 billion. Suffice it to say that ETH’s daily trading volumes are only 6.3 billion, lower even than BUSD’s. 

USDC is detached with only 2 billion. 

Investors’ fears

The main fear of stablecoin holders is that they will not be able to return the tokens in exchange for the collateral, or will only be able to do so partially. Stablecoins work properly only if they are redeemable 1:1 with the collateral. 

From this point of view, it would actually seem that USDC is the one that gives the most guarantees, although even then they are not 100 percent guarantees. 

As a matter of fact, the company that issues and manages it, Circle, is regulated and follows strict U.S. regulations. 

BUSD has Binance, which is the world’s largest crypto exchange, behind it, so it is considered quite reliable, but there have been doubts about Tether for years. 

Despite this, however, Tether has never given any sign of being unable to return dollars at par to those who would redeem USDT, so until now such fears have proven to be overblown. This does not detract from the fact that there could theoretically be problems in the future, but this is a discussion that applies to any stablecoin, including USDC and BUSD. It is only a matter of a higher or lower percentage of risk, but never nothing. 

What has happened this year to the market capitalization of USDT, USDC and BUSD pretty well sum up these dynamics, with USDT remaining well above its two rivals even after falling to annual lows in this respect. 

At this point, it is hard to imagine that Coinbase’s suggestion will change things significantly.