President Biden’s Working Group on Financial Markets finally issues its report on stable coins. The report could spell trouble for Tether in particular.
- A long-awaited report calls for Congress to pass laws to regulate stablecoins as banks.
- The recommendations could challenge the business model or even the existence of firms like Tether.
The U.S. government published a long-awaited report on stable coins on Monday, outlining proposed measures that could pose challenges to the business model, or even the very existence of some companies that issue the digital tokens, which are designed to hold the same value as fiat currencies like the dollar.
The report, published by a consortium of federal agencies including the Treasury Department, calls for Congress to pass laws that would require stable coin issuers to become “insured depository institutions”—or, in other words, banks.
This designation would be a major shift for certain stable coin issuers, especially Tether, which have long operated in the regulatory shadows. It would place restrictions on the types of collateral they could use to back their stable coins and force them to pay for compliance, insurance, audits, and other measures that go with being a bank.
The report came about at the behest of the Biden White House, which tasked the President’s Working Group on Financial Matters—an inter-agency group that also includes the Securities and Exchange Commission and the Federal Reserve—with developing a regulatory framework to oversee the stable coin market, which is now valued at around $130 billion.
Tether, which issues a token by the same name and trades as USDT, has long been the biggest player in the stable coin market, but it has also been the subject of criticism that its reserves are not fully backed by dollars. The company was recently fined by the Attorney General of New York and is reportedly the subject of investigations by the Justice Department and other law enforcement agencies.
The new rules will also affect Circle, which is the second biggest stable coin issuer and which works closely with the San Francisco-based cryptocurrency exchange Coinbase. Circle’s CEO, Jeremy Allaire, has long touted its USDC token as highly regulated, but the company came under scrutiny this summer when smaller rival Paxos published a blog post showing that the company’s reserves included assets like bonds and commercial paper.
In response, Circle pledged to hold only dollars and short-term Treasury bills and to apply for a federal bank charter. In a statement, Allaire praised the report’s recommendations.
“We are fully supportive of the call for Congress to act and establish Federal banking supervision for stable coin issuance. The rapid scaling and strategic importance of this to dollar competitiveness in the age of crypto and blockchains are critical,” he said.
Paxos, for its part, has long touted that its reserves have always been backed only by dollars and that it is registered as a regulated trust company—a designation that is not the same, however, as an “insured depository institution.”
“We’ve established a culture of productive engagement with regulators and policymakers because collaboration on this crucial technology will foster growth and benefits for all Americans. We look forward to engaging further with all policymakers regarding the future of stable coins,” said a Paxos spokesperson.
Both Circle and Paxos have treated new rules for stable coins as a potential opportunity, hoping that their close ties with regulators will afford them a chance to expand their market share at the expense of Tether and other firms that operated more loosely.
According to Maya Zehavi, a prominent crypto investor who has worked closely with regulators, the strategy of the Biden White House is likely to cripple Tether while allowing more regulated competitors to existing. Such a strategy would recognize the reality that it would be impossible to regulate crypto out of existence—as some in Washington may wish to do—so that it makes sense to bring parts of crypto, especially stable coins, under the regulatory umbrella of the banking system.