As Tether and its associated partners approach a January 15th hearing with the New York Attorney General’s office, it appears the infamous “printing press” that produces new USDT tokens has been more active than ever. With a large portion of the “money” flowing into digital asset markets recently (and inflating asset prices) coming from USDT, any regulatory action against it could have a large negative impact.
The NYAG hearing concerns an ongoing injunction that prevents Tether Holdings Limited from loaning funds to the Bitfinex exchange. Tether Holdings Limited shares a parents company (Digifinex Inc.) with Bitfinex’s own owner, iFinex. That injunction stems from the 2019 lawsuit James v. iFinex Ltd. which accused iFinex of covering up losses.
All these legal issues have shone a brighter light on what Tether actually is, who issues it, and under what conditions (legal and otherwise) they operate. Is Tether a “stablecoin,” a security, a derivative, or a decentralized blockchain asset? Is it backed by actual USD reserves, a combination of USD and “other assets” as Tether’s lawyers have claimed… or is it simply a private money printer used to pump the price of assets like BTC, so traders can cash out in real dollars?
There are serious arguments that Tether, which represents the value of fiat currencies (mainly USD) represents a derivative. After all, the asset derives its value and claimed legitimacy from an underlying asset—the U.S. dollar.
A derivative, like a security, would need to be registered with the SEC or CFTC to be sold to/used by U.S. customers. Their issuers would face the same reporting requirements as either of those instruments. U.S. regulators also cast a wide net when determining what lies within their jurisdiction, so any claims by stablecoin operators that they exclude U.S. participants aren’t likely to fare well. Nor are arguments that the parties issuing the assets are sufficiently decentralized. Regulators are perfectly capable of tracing them back to the individuals who created them and set the conditions, and examining how this was done.
It’s possible that Tether (both the issuers/managers and the USDT asset itself) could soon suffer a similar fate to Ripple and XRP, which the SEC alleges is an unregistered security. This has not only created legal headaches for Ripple, but also major exchanges such as Coinbase which listed XRP on their platforms.
Tether printer go brrrrr
If there’s any regulatory threat to Tether’s ability to print USDT/USD value out of thin air, it’s easy to see why supporters could be rushing to convert as much of that into BTC and cash as quickly as possible.
Tether production appears to have ramped up recently, with nine-figure batches of USDT minted and presumably headed for exchanges.
1.5 billion in less than 48hrs
Minting in bigger blocks now. If we maintain this rate of change, the Fed will be jealous before too long… pic.twitter.com/NAQkJ1DoG1
— Travis (not a Cylon) Kimmel (@coloradotravis) January 9, 2021
Even Bitcoin SV (BSV), which has remained relatively stable amid the recent hype, saw huge price volatility over the past weekend, rising suddenly from $183 to almost $320, before falling back to around $200 almost as quickly.
Curious market watchers have frequently pointed out that the prices for BTC and other digital assets tends to “pump” right after large batches of new Tether (USDT) tokens are minted and issued by the Tether Treasury. BTC in particular saw highs above US$40,000 last week. Should a U.S. regulator deem stablecoins unregistered (and thus illegal) securities—or pursue sanctions against Tether‘s issuers, managers or partners—confidence in the asset could drop sharply, taking BTC and other asset prices with it.
The recent announcement of an SEC lawsuit against Ripple and the XRP asset hasn’t stopped it from remaining one of the top five digital assets by market cap, and XRP’s unit price has continued to rise and fall, rather than drop to nothing. Perhaps the market doesn’t consider the action fatal. However, it’s possible Tether is supporting a large percentage of digital asset market value in general. Should that rug be yanked out from underneath it, the consequences could be more severe.
Possible new laws for stablecoins
The President’s Working Group on Financial Markets (PWG) released a statement in late December 2020 which noted that, while digital stablecoins could have economic benefits, they needed to be designed and operated in a responsible manner:
While encouraging payments innovation, PWG Members emphasize that digital payments systems, including stablecoin arrangements, should be designed and operated in a responsible manner that effectively manages risk and maintains the stability of the U.S. domestic and international financial and monetary systems.
It added that stablecoins may need “additional safeguards” in a time when they are adopted at a significant scale for use in retail payments.
At present, few if any purportedly blockchain-based stablecoin assets are used in retail transactions. Their main purpose is to park and move USD value for exchanges and their customers.
Circle’s Jeremy Allaire (Circle is part of the consortium that created the alternative USDC stablecoin) was optimistic last week that the U.S. Treasury department would soon allow banks to use public blockchain assets (eg: stablecoins) as transaction settlement infrastructure:
1/ Breaking major news from US Treasury OCC, the largest US banking regulator (@USOCC), with new guidance allowing US banks to use public blockchains and dollar stablecoins as a settlement infrastructure in the US financial system. https://t.co/gQFWISWUnc
— Jeremy Allaire (@jerallaire) January 4, 2021
Whether or not U.S. regulators legitimize stablecoins for this purpose, it’s clear that would come with far greater oversight into their operations. Issuers would not be permitted to operate for years in ambiguity as Tether has, and the public would have to know exactly what is backing the asset, with audits specifying how much of each backing asset there is, and where it is kept.
Step by step, the digital asset industry is being forced to fall into line with the rest of the financial industry, and follow the same rules. This probably would see an end to the crazy price speculation and volatility it has become notorious for.
Bitcoin BSV has remained more stable than others recently (much to the complaining of speculative “investors”) because the aim is to have an asset valued by its actual utility, rather than hot air. BTC may have risen from $17,000 to $40,000 since October 2020, but it’s laughable to claim those prices are based on increased utility—BTC is rarely used for purchases; most of its transactions are to and from exchanges. Speculators may complain about BSV’s lack of quick gains, but those speculators are also hurting the long-term viability of the market. Only a solid, steady growth based on real-world use is actually good for Bitcoin. Certainly, pumping the price with dubious “stablecoins” isn’t the way to go—only building a real ecosystem, and actually using the network for its intended purpose, is good enough.
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