Banning Tether Could Weaken USD’s Global Position, Experts Warn

Banning Tether, a prominent stablecoin, from the US market could pose significant threats to national monetary security. Drafts of the Stablecoin Act circulating in the US aim to prohibit non-US stablecoin issuers from operating within the country due to their offshore operations. This approach, however, is seen as a significant policy error by Tom Howard, Head of Financial Products and Regulatory Affairs at CoinList.

Howard argues that a robust global reserve currency thrives by exporting itself to foreign markets, not by pulling it back home. Attempting to force all USD-denominated stablecoins to reshore deposits to US banks ignores the critical monetary principle known as “Triffin’s dilemma.” This principle describes how exporting currency overseas strengthens international demand but risks domestic inflation if too much of that currency returns home. Reshoring USD relates to monetary policy and is generally undesirable for the nation.

Stablecoin innovation represents an opportunity to export even more USD offshore and increase USD’s strength and liquidity as a global reserve currency. However, the market preference for non-US issued stablecoins, such as Tether (USDT), is clear. Users in non-US markets, from Asia to Africa to Latin America, prefer USDT over US-based stablecoins due to perceptions of autonomy and fears of government abuses. These fears are exacerbated by events such as the perceived overuse of sanctions powers and issues with money transfer freezing in cross-border or remittance payments.

Banning non-US issued stablecoins could have several negative consequences. It would reduce USD liquidity globally, harming users through increased transaction costs and weakening global demand for USD. It could also increase inflation risks by reducing foreign bank USD holdings and create geopolitical risks by allowing foreign adversaries to capitalize on unfilled market demand to create USD stablecoins backed by non-USD assets. For instance, China is already actively developing financial alternatives to the USD, as demonstrated by recent deals with the Saudi government for a USD-denominated bond backed by Chinese Yuan (RMB).

If forced to relocate reserves to US institutions, Tether would import significant volumes of USD back into the US, potentially exacerbating domestic inflation. Meanwhile, international demand for offshore USD tokens would persist, prompting competitors to fill Tether’s void overseas quickly. This would also reduce the USD holdings of foreign banks, which are critical to international USD liquidity and help increase foreign trade. It would also create more buyers for US treasuries as those banks invest their deposits in risk-free offerings.

A better path forward would be to amend the Stablecoin Act to create exemptions for foreign-issued stablecoins. This would allow these stablecoins to operate, trade, and be utilized within the US, but clearly label them as unregistered, higher-risk alternatives compared to fully US-regulated stablecoins. Such an exemption would encourage global innovation to serve offshore USD demand, enhance USD’s global usage without importing inflationary pressures, and keep market-based competition alive, letting consumers choose based on transparent risk disclosures. This could be accomplished by either explicitly excluding foreign-issued stablecoins from the “payment stablecoin” definition or by carving out a lighter registration process that only requires disclosures but not the higher standards that come with a US-approved stablecoin.

By allowing regulated coexistence rather than outright banning stablecoins like Tether, the US can strategically bolster the dollar’s global position, safeguard against inflationary risks, and encourage continued innovation in financial technology worldwide.