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Tether is struggling to keep its name out of negative headlines as its chief stablecoin rival, Circle makes moves to shore up its U.S. support network.
On May 15, the Public Security Bureau in the Chinese city of Chengdu announced the disruption of a “huge underground bank” that used Tether’s USDT token as “a medium to provide illegal services to customers who need to transfer funds abroad.”
The multi-year investigation resulted in the arrests of 193 suspects. The bank fueled a host of illegal activities, including financial fraud, drug trafficking, dodging import/export controls, and flouting China’s capital controls. The value of the sums handled by this bank totaled RMB13.8 billion (US$1.9 billion).
The official statement said the underground bank “used USDT as a medium to evade national foreign exchange supervision and illegally provide foreign exchange settlement channels, posing huge hidden dangers to national foreign exchange security and financial security.”
China takes its capital controls extremely seriously, and thus, Tether is likely winning no fans with the Party in Beijing. However, Tether’s regulatory issues are global, as its CEO Paolo Ardoino keeps revealing them in his ongoing social media squabbles.
Earlier this month, Ardoino tweeted his retort to a Deutsche Bank (DB) report that flagged Tether as one of the stablecoins that will “likely fail” given “the lack of transparency” regarding its operations. DB flagged Tether as “of particular concern, as its solvency is questionable.”
Despite years of promises to conduct a proper third-party audit of the reserves allegedly backing Tether’s nearly $111 billion in circulating USDT, Tether has chosen instead to release only half-baked ‘attestations’ that few observers are willing to take as gospel.
In response to the DB report, Ardoino tweeted about the bank’s “history of fines and penalties” and cited an International Monetary Fund (IMF) report from 2016 that called DB ‘the riskiest bank in the world.’
However, as others pointed out, Ardoino doesn’t appear to have read the IMF report, which linked the risk to DB’s connectivity to other global financial institutions and the possibility of contagion should DB suffer a significant setback. The IMF said this connectivity underscored the need for “intense supervision,” aka the kind of scrutiny Tether appears determined to avoid.
Around the same time, Ardoino got into a verbal dustup with Brad Garlinghouse, CEO of Ripple Labs, who told a podcast that it was “clear” to him that the “U.S. government is going after Tether” due to its prominent role in the ‘crypto’ ecosystem. Garlinghouse suggested a Tether takedown could prove to be a ‘Black Swan’ event, the ramifications of which he couldn’t predict.
Ardoino responded with a lengthy tweet slamming “an uniformed [sic] CEO, leading a company being investigated by the [Securities and Exchange Commission], launching a competitive stablecoin (cui prodest), is being reported spreading fear about USDt.”
Garlinghouse (uniformed or otherwise) responded by saying he “wasn’t attacking Tether,” merely pointing out that “the US govt has clearly indicated they want more control over USD-backed stablecoin issuers, and thus, Tether, as the largest player, is in their line of sight.”
Circle making moves
Ripple did indeed announce plans for a U.S. dollar-based stablecoin last month, plans that Garlinghouse said were inspired by the spring 2023 depegging of Circle’s USDC stablecoin. That depegging followed the collapse of Silicon Valley Bank, with which Circle had foolishly custodied $3.3 billion of its reserves in a single account.
That depegging contributed to a plunge in USDC’s market cap, which bottomed out at around $24 billion last November after topping $56 billion in mid-2022. The cap has since regained some ground and currently stands at just over $33 billion.
In January, Circle filed paperwork for an initial public offering (IPO) after scrapping previous IPO plans following the late-2022 implosion of all things ‘crypto.’ On May 15, Bloomberg reported that Circle had filed paperwork to repatriate its corporate headquarters from Ireland to America in preparation for its IPO.
While such a move would subject Circle to greater regulatory scrutiny and higher corporate taxes, it would also further Circle’s preferred narrative that USDC is the shiny, happy, drama-free stablecoin while USDT remains the criminal sociopath lurking in the shadows.
Circle also doesn’t perform proper audits on its reserves, but its attestations do cite the CUSIP numbers for its stash of Treasury bills. Tether has only gone as far as to invert the ‘don’t trust, verify’ mantra by claiming (without evidence) that Wall Street giant Cantor Fitzgerald (NASDAQ: ZCFITX) is its T-bill custodian.
This has led Circle execs to publicly suggest that if the U.S. government is indeed serious about cracking down on Tether’s crime connections, it should target Cantor. Ardonio called this suggestion “a shocking act of desperation” on Circle’s behalf. (Only if it doesn’t work, Paolo.)
Know-nothings meet do-nothings
There are two stablecoin bills currently languishing in Congress: the Clarity for Payment Stablecoins Act of 2023 and the Lummis-Gillibrand Payment Stablecoin Act of 2024. Both bills would force greater transparency for stablecoin issuers re their reserve assets, which could put Tether on the back foot in terms of its access to U.S. financial institutions—including Cantor.
Fortunately for Tether, Congress is a dysfunctional mess, and no one seriously expects level-headed unanimity to seize the day. The best that can be hoped for at this point is a vote next week on a third bill, the Financial Innovation and Technology for the 21st Century Act (FIT21).
FIT21 aims to establish an overall regulatory structure for all things ‘crypto,’ including ‘permitted payment stablecoins.’ But while FIT21 may pass a House of Representatives floor vote next week, few expect it to be taken up in the Senate, let alone approved, in the time remaining before November’s election.
That’s not to say ‘crypto’ boosters aren’t continuing to push for some kind of progress. Last week, former House Speaker Paul Ryan told Bloomberg TV that some kind of stablecoin legislation “could be done this year,” but much would depend on negotiations between House proponents and Senate skeptics.
Assuming that unlikely scenario comes to pass, Ryan predicted the overall stablecoin market cap could go from its current “couple hundred billion” to “maybe trillions.” Ryan claimed that this would make the dollar “more deeply ingrained into the ongoing digitization of currencies” and increase the need for companies to buy T-bills.
Circle boss Jeremy Allaire responded to Ryan’s comments by saying “we are crossing the chasm.” If by that, Allaire means ex-politicians might dare advocate for specific causes in exchange for money, well, that chasm was crossed a long time ago.
License to Ill(icit)
Tether caught a rare stateside break on May 16 as the U.S. Treasury Department issued its 2024 National Illicit Finance Strategy. The Strategy follows up on the money laundering, terrorist financing and proliferation financing risk assessments the Department released in February.
While the risk assessments singled out USDT as terrorists’ preferred digital asset, the 2024 Strategy spares Tether further embarrassment, saying only that it plans to “pursue the stablecoin recommendations from the President’s Working Group on Financial Markets, including ensuring that stablecoins have a proper [anti-money laundering/countering the financing of terrorism] framework and that there are sufficient resources to support domestic supervision.”
And as for supervising those international ne’er-do-wells whose stablecoins are indispensable to Russia’s war effort, help Venezuela’s state-run oil firm evade economic sanctions, and are responsible for 84% of pig butchering transaction volume?
Coke adds life (sentence)
Despite this rare regulatory reprieve (of sorts), Tether can’t seem to stop digging its reputational hole deeper. On May 16, Tether announced a new tie-up with the mobile payment app Oobit and the TON Foundation. The plan is to facilitate retail purchases using USDT issued on TON, the blockchain offshoot of the Telegram messaging service.
There are currently around $330 million of USDT issued on TON, a fraction of the USDT on Tron and Ethereum, but nonetheless, it is impressive given that USDT only launched on TON a month ago. The deal with the Lithuania-registered Oobit—in which Tether led a $25 million financing round this February—is expected to accelerate the growth of USDT on TON.
On May 15, Oobit’s official X/Twitter account offered a tutorial on how to use USDT to buy products from merchants under the provocative title ‘HOW TO BUY COKE WITH CRYPTO?’ While the tweet clarified that the product their rep wanted to buy was Coca-Cola, the fact that Tether recently played a starring role in a Department of Justice indictment of a cocaine trafficking ring suggests Ardoino may wish to vet his partners’ future marketing efforts a little more closely.
Either that or have Oobit make a video asking ‘HOW TO PAY BAIL WITH CRYPTO?’
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