USDT and other Stablecoins Face Crackdown as U.S. Discusses Risk Council Review

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The United States of America officials are discussing launching a formal
review into whether Tether and other stablecoins threaten financial stability,
scrutiny that could lead to dramatically ramped-up oversight for a fast-growing corner of the crypto market.

U.S. officials are discussing launching a formal review into whether Tether
and other stablecoins threaten financial stability, scrutiny that could lead
to dramatically ramped-up oversight for a fast-growing corner of the crypto
market.

After weeks of deliberations, the Treasury Department and other federal
agencies are nearing a decision on whether to launch an examination by the
Financial Stability Oversight Council, said three people familiar with the
matter who asked not to be named in commenting on closed-door discussions.

FSOC has the power to deem companies or activities a systemic threat to the
financial system -- a label that typically sets off tough rules and aggressive
monitoring by regulators.

Such a designation would likely be a gamechanger for stablecoins, which are
considered crucial to the crypto market because traders widely use them to buy
Bitcoin and other virtual currencies.

Stablecoins have thrived in the unregulated shadows, with tokens in
circulation now worth more than $120 billion, according to CoinMarketCap.com.
And they are increasingly being used for transactions that resemble
traditional financial products -- like bank savings accounts -- without
offering anywhere near the same level of consumer protections.

A hallmark of stablecoins is that they are pegged to fiat currencies, meaning
they are supposed to be immune to the wild price swings that have plagued
Bitcoin. Tether and other firms achieve that by backing their tokens with
assets like U.S. dollars and corporate debt.

The President’s Working Group on Financial Markets, which is led by Treasury
Secretary Janet Yellen, has been particularly focused on Tether’s claims that
it holds massive amounts of commercial paper -- debt issued by companies to
meet their short-term funding needs. In a private meeting U.S. officials held
in July, they likened the situation to an unregulated money-market mutual fund
that could be susceptible to chaotic investor runs if cryptocurrencies plunge.

The President’s Working Group plans to issue stablecoin recommendations by
December, and a consensus is building among regulators involved that an FSOC
review is warranted, the people said. The groups overlap, as Yellen, Federal
Reserve Chairman Jerome Powell and Securities and Exchange Commission Chair
Gary Gensler are members of both the PWG and oversight council.

A Treasury spokesman declined to comment.

The FSOC process includes a lengthy study and an assessment of which federal
agencies should respond and how. In the end, the council could direct those
agencies to intervene in the market and reduce the dangers posed by stablecoin
transactions.

While Tether is the most popular stablecoin, there are multiple rivals,
including Coinbase Global Inc.’s USDC token and a dollar-linked offering from
Binance Holdings Ltd.

Scrutiny has been ratcheting up as stablecoins proliferate. Coinbase made
headlines this week by disclosing the SEC had threatened to sue if the crypto
exchange launched a product that would allow customers to earn 4% yields for
lending out their USDCs to other traders. The SEC believes the Coinbase
proposal is an investment contract that should be registered with the agency,
a view the company aggressively contested in a blog post and a series of
tweets.

Watchdogs have also privately expressed worries about Diem, a stablecoin being
developed by an association that includes Facebook Inc. A top concern is that
the token’s market impact could be massive because of its potential for
widespread adoption -- Facebook’s social media network has almost 3 billion
active users.

Treasury held meetings this week with industry representatives to ask them
about the potential dangers associated with stablecoins. As it and other
agencies consider taking action, they’re facing intense pressure from Capitol
Hill.

“I urge FSOC to act with urgency and use its statutory authority to address
cryptocurrencies’ risks,” Senator Elizabeth Warren wrote in a July 26 letter
to Yellen that flagged the stablecoin market’s interconnectedness and its
susceptibility to investor runs. “The longer that the United States waits to
adapt the proper regulatory regime for these assets, the more likely they will
become so intertwined in our financial system that there could be potentially
serious consequences.”

Stablecoins already face another threat from the U.S. government, as the Fed
is discussing whether to launch its own digital currency. Powell told
lawmakers in July that a central bank token would make stablecoins obsolete.

“That’s one of the stronger arguments in its favor,” he said.

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