US Payment Stablecoin Act

US Payment Stablecoin Act could pose trouble for Tether

The Payment Stablecoin Act, introduced to the U.S. Senate on April 17, could spell trouble for Tether and algorithmic stablecoins.

A research note published by S&P Global Ratings highlighted some of the Act’s proposals and spelled out their potential consequences.

The key takeaway was that, if passed in its current form, the Payment Stablecoin Act would encourage U.S. banks to step into the stablecoin market and would even give them a competitive advantage.

Among other measures, the Act would limit non-bank stablecoin firms to $10 billion, ban unbacked algorithmic stablecoins, and require all issuers to provably hold one-to-one cash or cash equivalents.

Assuming it passes and applicable bank regulations follow, the Payment Stablecoin Act would open the door for America’s biggest banks to get involved in stablecoins. It would also cause problems for offshore operators like Tether.

What does the Payments Stablecoin Act mean for Tether?

To put it bluntly, it wouldn’t be good. Not only is Tether not U.S.-based, not a bank, and not provably backed by cash and cash equivalents, but it has a market cap far greater than the $10 billion limit the Payments Stablecoin Act would allow. Furthermore, given its past ruins with the law, the firm has a near-zero chance of ever obtaining a banking license in the United States.

Of course, this doesn’t mean Tether would have to shut shop overnight; it has violated many rules and regulations and lived to tell the tale. This means that USDT would not qualify as a permitted payment stablecoin in a country that sits atop the global financial system. This obviously isn’t good for the long-term viability of any business.

The Act may also pressure Tether to conduct proper audits and prove its reserves. After all, why would any rational economic actor choose to deal with a shady offshore operator that claims it is fully backed when they could deal with regulated entities like JP Morgan Chase (NASDAQ: JPM) or Wells Fargo (NASDAQ: WFC) and enjoy all the protections it brings?

The US is getting serious about stablecoins

The Payment Stablecoin Act would be a large step forward from the point of view of providing much-needed regulatory clarity in the United States.

It signals a shift in gear as the U.S. gets serious about regulating digital currencies, particularly stablecoins. Last week, a paper by the Brookings Institute labeled the unchecked proliferation of USD stablecoins a national security issue and called for robust regulation to deal with them.

As the U.S. government understands stablecoins and their potential implications, expect more regulated competitors, stricter enforcement of AML/CTF rules on issuers, and increasing pressure on exchanges, wallet providers, and even nodes and validators to cooperate with law enforcement and even enforce rules themselves.

While the future looks bleak for firms like Tether that played fast and loose with the law, increased regulation will ultimately be a good thing. Free market proponents should welcome the increased competition, clear rules enable and embrace regulations that allow safer, better options to exist.

Sure, it gives the banks a leg up, but what’s new there? If the Payment Stablecoin Act can prevent another UST/LUNA event and can force the likes of Tether to be more transparent or leave our markets, this author is all for it.

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