Venezuela shows how locals turn to Tether-issued USDT stablecoin as governments wobble

Although USDT may sound like a perfect solution to using “virtually worthless” fiat such as the Iranian rial and the Venezuelan bolívar, the token — like most things — isn’t perfect, Di Bartolomeo noted.

While stablecoins like USDT are designed to always be equal to $1, their prices don’t always remain stable, particularly when demand rises.

Earlier this month, demand for USDT surged due to the U.S. attack on Venezuela, causing the token to trade as high as roughly $1.40 on some peer-to-peer exchanges.

That fluctuation in cost underscores ongoing liquidity issues in the cryptocurrency market that have hindered mass digital assets adoption. However, it also speaks to the extent to which virtual currencies are looked to as an “escape valve” among individuals living under extreme political and economic conditions, Haonan Li, co-founder and CEO of stablecoin infrastructure firm Codex, told CNBC.  

“This was a violent repricing driven by fear,” Li said. “As confidence in the bolívar collapsed, demand for dollars via Tether exploded, pushing the peer-to-peer USDT price in Venezuela up roughly 40% almost overnight.”

He added that the event wasn’t caused by speculative activity among retail traders. Rather, “they were trying to get out of fiat as fast as possible,” in an emergency situation, Li said.

“That surge in demand created arbitrage opportunities, but more importantly it highlighted how stablecoins function as a real-time safety rail in emerging markets when traditional systems crack,” he added.

The situation temporarily hurt some Venezuelans attempting to secure their savings via a digital, dollarized solution, forcing them to pay a premium to convert their bolívares to USDT. And, that’s one of just a few potential risks stablecoins could pose.  

Converting high volumes of fiat to dollar-pegged stablecoins leads to high capital outflows, which could contribute to local currency depreciation, Zero Knowledge Consulting CEO Austin Campbell told CNBC.

“If you have a very repressive regime that’s been, to put it bluntly, being s— to all of its citizens, giving everybody a way to get their money out from under the regime so they can do whatever the hell they want could cause the local currency to collapse,” said Campbell, who is also an adjunct professor at NYU.  

However, that kind of situation isn’t always a bad thing, the stablecoin expert noted. Local currency depreciation can also serve the purpose of “put[ting] pressure on the regime and caus[ing] them problems. So, that may be a feature, not a bug,” Campbell said.

And, to be sure, any risk incurred by using stablecoins under authoritative regimes is surely worth the reward, he noted.

“When the only other option is the government steals all your money, [USDT] is still the better option,” Campbell said.