Proposed new legislation in the U.S. Senate aims to bring order to the $157 billion
stablecoin market, assuming the bill can make it through a supremely dysfunctional Congress.
On April 17, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) released a draft of their new Lummis-Gillibrand Payment Stablecoin Act of 2024. The bill is an updated version of the stablecoin language in the pair’s Responsible Financial Innovation Act that was introduced in 2022 but failed to pass during that Congressional session.
The new bill echoes the ‘payment stablecoin’ phrasing of the Clarity for Payment Stablecoins Act of 2023, currently languishing in the House of Representatives. While this ‘payment’ language is ostensibly intended to highlight the use of stablecoins in paying for goods and services, its true purpose is to draw a distinction between Tether, the issuer of the dominant but controversial USDT stablecoin, and its U.S. rival Circle, the slightly-more-compliant/less-associated-with-crime issuer of the USDC stablecoin.
One of the remaining obstacles to passing the House bill is a dispute over who gets to oversee stablecoin issuers, with Republicans favoring state-level regulation while the Democrats pushing for some federal oversight.
The Lummis-Gillibrand bill attempts to split this difference, allowing state non-depository trust companies to issue stablecoins with market caps below $10 billion, while the federal Office of the Comptroller of the Currency (OCC) would have responsibility for stablecoins with higher caps. Once a state-level issuer’s cap reaches $9 billion, ‘transition’ planning for conversion to the $10 billion-plus category must begin within 180 days.
Both the OCC and the U.S. Federal Reserve would have the right to take independent enforcement action against larger stablecoin issuers but would need to act jointly with a state to go after one of their sub-$10 billion issuers.
The bill would prohibit so-called ‘algorithmic stablecoins’ like UST, the Terraform Labs token that claimed to maintain its 1:1 peg with the U.S. dollar via a convoluted formula linked to Terraform’s LUNA token. Both UST and Luna collapsed in the spring of 2022 when this formula was exposed as a pipe dream.
The bill requires stablecoin reserve assets to be held on a 1:1 cash or cash-equivalent basis. The latter include demand deposits at a depository institution, Treasury bills, bonds, or notes with maturity dates less than 90 days, and repurchase agreements with a maturity of seven days or less backed by T-bills with a maturity date of one year or less.
In a blow to Tether’s U.S. aspirations (such as they are), the bill would require stablecoin issuers to issue monthly reports on “the assets backing the payment stablecoin, the value of the assets, and the number of outstanding payment stablecoins.” Tether has steadfastly
refused to conduct a third-party audit of its reserves, instead issuing half-baked ‘attestations’ that often raise more questions than provide answers.
Stablecoin issuers will have one business day in which to honor redemption requests, in whatever amount. Tether famously refuses to redeem its USDT tokens for any ‘customer’ who wants to redeem less than $100,000. Tether famously reserved the right not to redeem “for any reason (or for no reason) at any time.”
Tick, tick, tick…
After the bill was released, Gillibrand told CNBC that she and Lummis had “great partners in the House” in Reps. Patrick McHenry (R-NC) and Maxine Waters (D-CA), who have been wrestling with the ‘Clarity’ bill. Asked for an estimate of how soon the two bills might be reconciled, Lummis expressed hope that it would be “weeks rather than months” but acknowledged that this process might have to wait until the lame-duck session following the November election.
Earlier this week, Bloomberg reported that noted ‘crypto’ critic Sen. Sherrod Brown (D-NY) was reportedly open to pushing stablecoin legislation through the Senate Banking Committee that Sherrod chairs, provided proponents address his lingering concerns. Other sources claim stablecoin language could be attached to legislation that would allow banks to provide services to licensed marijuana operators, which has already passed out of Brown’s committee.
CNBC host Andrew Ross Sorkin raised the subject of Tether’s stablecoin and its links to Iran, Russia, and other dark alleyways, then asked Gillibrand and Lummis how that related to their bill. Gillibrand said the bill was “really the first step toward addressing illicit finance” and “bringing that level of transparency and accountability into blockchain and cryptocurrency.”
Asked how this might impact Tether’s U.S.-based users, Gillibrand fudged, saying that “if you are not complying and not following the law, then you can be investigated. This [bill] has real regulatory heft and regulatory teeth … this is going to preclude bad actors from being in the U.S.-based system.”
US exchanges in the hot seat
The bill contains no explicit reference to Tether, but a press release accompanying the bill claims that “legislation with strong penalties for issuing a USD-denominated stablecoin without conforming to U.S. financial crimes rules would immediately cripple a source of funds for Hamas, Hezbollah, Chinese fentanyl traffickers, North Korea, and Russian sanctions evaders.”
The bill states that any stablecoin issuer that fails to register or be authorized under its provisions can face civil penalties of up to $1,000,000/day for the duration of such failure. Of course, enforcing penalties against an entity like Tether that lacks a U.S. presence could prove difficult. That is unless you take Circle’s advice and target the tens of billions in U.S. Treasury bills that Tether has (allegedly) custodied with Wall Street giant Cantor Fitzgerald
(NASDAQ: ZCFITX).
Interestingly, neither Tether nor Circle have yet to publicly comment on the Gillibrand-Lummis bill. Tether is staying shtum because they know they have no hope of ever abiding by U.S. regulations, particularly those involving the banking system. Circle is keeping quiet because they don’t want to cheerlead and make it even more obvious that this bill might as well be called the U.S. Domestic Stablecoin Protection Act.
Also keeping quiet are two U.S. digital asset exchanges: Circle’s USDC partner, Coinbase
(NASDAQ: COIN), and Kraken. Tether accounted for 13% of Coinbase’s trading volume in its most recent quarterly report, while Kraken has garnered a reputation as the place for U.S. customers to exchange USDT for filthy fiat currency. As of Wednesday afternoon, just two USDT trading pairs (USD & EUR) accounted for 37% of Kraken’s trading volume.
As Circle’s partner, Coinbase may see an upside in USDC taking a stronger role in U.S. trading, but Kraken won’t enjoy USDT’s absence one little bit.
No Warren peace
The Lummis-Gillibrand bill contains only a single money laundering reference—a conviction is grounds for appointing a conservator or receiver for a stablecoin issuer—so it likely won’t be enough to satisfy ‘crypto’ skeptic Sen. Elizabeth Warren (D-MA).
Warren just sent a letter to Treasury Secretary Janet Yellen referencing last week’s Senate Banking Committee hearing at which Deputy Secretary Adewale Adeyemo asked Congress for additional tools to tackle ‘crypto’ crooks, including Tether.
Warren’s letter says “the full suite” of Adeyemo’s requested anti-money laundering tools “must be adopted into any legislation Congress advances to create a new regulatory framework around the $157 billion stablecoin market.”
In fairness, Warren writes a lot of these letters. Nevertheless, expect Warren to push for amendments to Lummis-Gillibrand before it gets out of her committee.
Tether embraces regulation, just not those … or those … or …
Tether CEO Paolo Ardoino didn’t do his cause any favors last week by giving a bonkers interview regarding his company’s unwillingness to secure permission to operate under the European Union’s new Markets in Crypto Assets (MiCA) framework.
While insisting that Tether is “in favor of regulation in general,” Ardoino confessed to being “rather pessimistic about the development of crypto in Europe.” Ardoino claimed that MiCA was a signal that “Europe does not want crypto with regulation that largely limits access to it, especially for retail investors.”
Ardoino claimed MiCA placed “very restrictive measures on stablecoins,” in particular, the requirements to hold significant portions of fiat reserves in cash deposits in local banks and to spread those deposits across multiple banking institutions. Of the nearly $109 billion in circulating USDT, Tether currently keeps less than 1% of its fiat reserves in cash.
Ardoino complained that “it’s already very difficult to get just one” bank to accept ‘crypto’ business, let alone several. Tether has indeed struggled to find willing banking partners
other than questionable outfits in the Bahamas.
Getting banks on the side is even more difficult given Tether’s pivotal role in global criminal operations, including money launderers, drug traffickers, ‘pig butchering’ scammers, and terrorist groups.
After the article began making waves, Ardoino tweeted some damage control, claiming to be “still discussing” his concerns with European regulators. But with new rules set to kick in on June 30, the clock is ticking.
Tether is also facing a reckoning in the U.K., which is planning to impose its own stablecoin rules this summer. The specifics remain murky, but, based on a Bank of England (BoE) discussion paper from last November, Paolo won’t like these much either.
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