What Are the Risks of USDT?

In the cryptocurrency market, USDT (Tether) is a widely-used stablecoin that plays a crucial role. However, there are various potential risks associated with it that should not be overlooked. Below is an in-depth analysis based on the risks of USDT, aimed at safeguarding your journey in the cryptocurrency market.

USDT Risk Analysis

1. Credit Risk
   The value of USDT relies on the claim by its issuer, Tether Ltd., that it is backed by a 1:1 reserve of US dollars. However, the transparency of Tether’s reserve assets has long been questioned. Although Tether asserts that each USDT is supported by corresponding US dollars or other assets, the majority of its reserves are not in cash but in commercial papers, loans, and other assets. This means that in the event of large-scale redemptions, Tether may not be able to fully honor all USDTs, leading to a potential de-pegging from the US dollar.

2. Regulatory Risk
   Regulatory policies for cryptocurrencies and stablecoins are tightening globally, posing increasing challenges for USDT. For example, the EU’s Markets in Crypto-assets Regulation (MiCA) will come into effect in July 2025, and Tether currently does not meet the regulatory requirements of this act, which may restrict its use in the European market. In addition, the US is also considering passing relevant bills, such as the GENIUS Act, which requires stablecoins to be fully backed by cash and short-term US Treasury bills. This could have a significant impact on USDT’s operating model.

3. Liquidity Risk
   The liquidity of USDT is crucial in the market, but it may be insufficient in certain extreme situations, such as large-scale redemptions or market panics. For instance, during the Silicon Valley Bank crisis in 2023, USDT briefly de-pegged to 0.95 US dollars, showing its vulnerability in extreme market conditions. Moreover, if the reserve assets of USDT (such as US Treasury bonds) experience market fluctuations, it could also affect its liquidity.

4. Legal and Compliance Risk
   Tether Ltd. and its associated exchange Bitfinex have been accused of misappropriating funds to cover corporate financial gaps. Although a settlement was eventually reached, this incident has further raised doubts about the transparency and compliance of Tether. In addition, USDT is widely used for illegal fund transfers, including money laundering and fraud, which also exposes it to more legal risks.

5. Technical Risk
   As a cryptocurrency based on blockchain technology, USDT is also vulnerable to technical vulnerabilities and hacking attacks. For example, in 2018, Tether suffered a hacking attack that resulted in the theft of 30 million USDT. Furthermore, vulnerabilities in smart contracts, congestion or failures in the blockchain network can all affect the security and transaction efficiency of USDT.

6. Market Risk
   The stability of USDT’s value may be challenged in times of extreme market volatility. For example, a sharp drop in the price of Bitcoin or other mainstream cryptocurrencies may trigger panic selling in the market, causing USDT to temporarily lose its peg to the US dollar. In addition, the widespread use of USDT in the cryptocurrency market also makes it susceptible to overall market fluctuations.

7. Centralization Risk
   USDT is issued and managed centrally by Tether Ltd., which exposes it to corporate governance and transparency issues. Tether may unilaterally adjust the issuance volume or reserve policies of USDT, and users have little oversight or control over these actions.

8. Legal Risk (in China)
   In China, holding USDT itself is not illegal, but transactions involving USDT may violate the law. For example, assisting in information network criminal activities (such as money laundering, fraud, etc.) may face criminal penalties. In addition, frequent over-the-counter transactions may lead to bank accounts being frozen or marked as suspicious.

Conclusion

Despite its important stability and liquidity functions in the cryptocurrency market, USDT’s credit risk, regulatory risk, liquidity risk, legal risk, and technical risk should not be overlooked. Investors should closely monitor relevant regulatory developments, choose reputable trading platforms, and reasonably control their risk exposure when using USDT.