As a Taiwanese crypto investor residing in London, I daily grapple with the complexities of currency exchanges. Juggling conversions between $TWD, $GBP, $USD, and $USDT is far from straightforward. Ideally, financial transactions should be simple and efficient, a sentiment I’ve previously shared in “Challenges of Traditional Banking Foreign Exchange.”
In the search for simplified payment methods, the world of blockchain and cryptocurrency stands out. This innovation ranges from incremental advancements, like payments via blockchains, to disruptive breakthroughs, such as Decentralized Finance (Defi). At present, to reap the tangible benefits of Defi and blockchain innovations, a bridge to the real world is necessary. Enter stablecoins. $USDT (issued by Tether) has emerged as the frontrunner among them. It’s a $USD-backed digital currency, promising an easy exchange with Tether at any time.
Let’s ponder the inherent advantages of crypto:
- Decentralization: Your assets are secure from institutional interference, whether it’s account closures or bank collapses.
- Transparency: Traditional banking systems' fee structures and transaction paths can be opaque. In contrast, every transaction on the blockchain is transparent, detailing costs associated with specific smart contracts.
- Security: While traditional banks are vulnerable to bankruptcy and theft, the decentralized nature of crypto, particularly Proof of Work (POW) systems, ensures robustness. Control over 51% of computing power is a deterrent, safeguarded by cost implications and potential losses anchored in Tokenomics.
Despite its promise, the crypto world is intimidating for many, inundated with jargon and intricate concepts. One perplexing phenomenon that newcomers encounter is the premium associated with $USDT. It’s counterintuitive —$ USDT is pegged to the $USD, yet it often trades at a higher value. Why does this discrepancy exist, especially in contexts like Taiwan?
The customer exchanged 32.185 $NTD for 1 $USD ( Taiwan Central Bank), but exchanged 32.2 $NTD for 1 $USDT. Technically speaking, 1 $USD will only be higher for the retail and individual investor (>32.18 $NTD) because the commercial banks, for retail, will mark up for profit.
The following will delve into the reasons behind the premium of $USDT over $USD in Taiwan.
A. Market Dynamics and Trader Behavior
- Liquidity Constraints: Exchanges often face liquidity issues (especially for the unpopular trading pair, $TWD/$USDT), which can drive up the $USDT price. Limited liquidity can lead to larger bid-ask spreads, making arbitrage more challenging and thereby sustaining the premium.
- High Transaction Costs: Besides the premium, users may encounter high transaction fees when buying $USDT, contributing to its elevated price.
B. Regulatory Environment
- Strict Regulatory Environment: The stringent regulatory landscape in Taiwan, which imposes severe restrictions on the conversion of $TWD to foreign currencies, including $USD, naturally elevates the demand for $USDT as a more flexible alternative.
- Foreign Exchange Control: To maintain economic stability, the government exerts tight control over the foreign exchange market, sometimes leading to a black market premium on $USDT due to the unofficial avenues of acquisition.
C. Economic Factors
- Inflation and Economic Policy: The economic policies in Taiwan, including their approach to inflation, could indirectly affect the $USDT pricing. High inflation rates can push individuals towards assets perceived to be stable, including $USDT.
- Foreign Currency Reserves: The desire to maintain high foreign currency reserves to secure economic stability might deter the government from encouraging $USD outflow, which in turn can impact $USDT pricing.
D. Global Factors
- Global Economic Conditions: Global economic conditions, such as fluctuations(Pegged asset) in the $USD value on the world stage, can indirectly influence $USDT pricing in Taiwan.
- International Relations and Sanctions: The geopolitical scenario, including international relations and sanctions, might affect the flow of $USD and, consequently, the $USDT market.
E. Demand and Supply Factors
- Technological Advancements: Advances in technology and the ease of using cryptocurrencies for various transactions can increase the demand for $USDT, affecting its price.
- Cybersecurity Concerns: Concerns about cybersecurity and potential fraud in the crypto space can sometimes affect people’s willingness to engage in $USDT transactions, potentially influencing its pricing dynamics.
- Shadow Economy and Black Market: Compared to the $USDT Premium and On-Off Ramp gas fee (approximately below 5%), Money laundering costs are much higher. Crypto has indeed become one of the tools for illegal business (One of the famous protocols, Tornato Cash, is sanctioned by the United States government).
4. Inefficiency and Corruption of the Government: Some of the local currencies fluctuate dramatically, leading to the business deciding to settle the transaction with $USDT, decreasing the counterparty risk and exchange rate risk
F. Societal Factors
- Public Perception and Trust: The public's general perception and trust level towards cryptocurrencies and $USDT, in particular, can play a substantial role in determining its pricing in the market.
- Financial Literacy and Education: The level of financial literacy and understanding of cryptocurrencies in the wider population can shape the demand and supply dynamics for $USDT, influencing its price.
Conclusion:
This premium is not only in Taiwan; we can check Kimchi Premium in South Korea (capital controls and financial regulations make profiting from the kimchi premium difficult for South Korean investors.)! The intricate dance of economics, technology, policy, and public perception converge to determine the value and demand for any asset, and $USDT in Taiwan is no exception. Despite being pegged to the $USD, various external and internal factors contribute to the observed premium on $USDT. Whether it’s the liquidity issues faced by exchanges, Taiwan’s stringent regulatory environment, or the broader global economic conditions, the premium of $USDT over $USD is a complex tapestry woven from these myriad factors.
While viewing $USDT’s premium as merely a pricing anomaly might be tempting, it’s essential to recognize it as a symptom of more significant systemic issues and trends. As global financial systems evolve and integrate more closely with digital assets like cryptocurrencies, the currency value, exchange, and transfer landscape will undergo further shifts. For investors, traders, and even the general public, understanding the root causes of such discrepancies is crucial. Only by dissecting and analyzing these underlying factors can we make informed decisions, anticipate future trends, and navigate the challenging waters of global finance in the digital age.
