Stablecoin AML extension necessary for US national security: Brookings Institute

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“Financial innovations can scale more rapidly than ever thought possible for reasons nobody could have predicted,” warned former Chair of the Commodity and Futures Trading Commission (CFTC) Timothy Massad in a recent paper for the Brookings Institute, pressing home the urgent need for more robust and comprehensive stablecoin
regulations.

In the paper, Massad argued that, unlike the rise of Eurodollars in the 1960s and 1970s, the rise of stablecoins may not be in the national interests of the United States. He also highlighted that the U.S. government wouldn’t have the same control over them due to their bearer nature.

The paper called for urgent stablecoin regulation for national security reasons, with Senator Elizabeth Warren (D-Mass.) calling for compliance with anti-money laundering rules at the wallet or validator levels. The underlying tone of the paper was one of urgency and a realization that acting later may be too late.

Stablecoin issuers should monitor blockchains and enforce rules

The paper argued that enforcing AML/KYC rules at the exchange level is inadequate. It called for stablecoin issuers to monitor blockchains for suspicious activity, freeze coins where necessary, and potentially refuse redemption.

Tether has already frozen wallets on multiple occasions, showing that at least some of this can be done. However, the Brookings Paper seems to call for a more proactive approach by issuers rather than a reactive one. It seems to be calling for regulations to make issuers responsible for enforcing the law when it comes to how their coins are used.

This, combined with Senator Warren’s call to enforce rules at the wallet and validator levels, will make for an interesting showdown between decentralization proponents and those who claim the existing financial laws have always applied to digital currencies.

Two ideological camps, and it’s coming to a head soon

While some argue that miners and validators are now mostly large corporations and would comply with legal orders and new laws just as any other business must, others dismiss this claim, saying that decentralization puts blockchain networks beyond the reach of national and international law. For example, some argue that, unlike Bitcoin miners, Ethereum‘s almost 1 million validators are largely unidentifiable, so enforcing the rules of any government on them would be practically impossible. Furthermore, some argue that this is the point of such networks.

Whichever side you fall on, the inevitable showdown between these two camps will be interesting, and it’s coming sooner rather than later. Recently, the Securities and Exchange Commission (SEC) sued Uniswap, a supposedly decentralized exchange, for securities violations. The outcome of that case will be informative to this ongoing debate.

Whatever happens in the short term, criminals hoping to use Tether, USDC, and other centrally-issued stablecoins to commit crimes and evade sanctions have another thing coming. They may be able to use volatile assets like Monero, which they will have trouble cashing out for fiat currency due to industry-wide deslistings, but using stablecoins like Tether with one issuing entity clearly isn’t going to fly.

Watch: Centi Franc—the truly stable stablecoin