Pressure rises on stablecoin to deliver on original promise

When stablecoins emerged in the cryptocurrency world, they were touted as a response to the inherent volatility of many digital assets. Most stablecoins would be backed by physical assets such as a currency, anchoring their value.

For some stablecoins, it clearly hasn’t worked that way, with a very important token called TerraUSD imploding spectacularly and another, Tether, facing constant questions about the support of its assets.

Confidence in the industry isn’t high, it’s fair to say, with some critics even wondering if stablecoins should exist.

The cryptocurrency industry is now under pressure from courts, regulators and lawmakers to more transparently show that it is delivering on the original stablecoin promise of supporting corporate assets.

Gary Gensler, chairman of the Securities and Exchange Commission, reiterated this month that stablecoins need more regulation, saying he will work with Congress to develop them. And in a more immediate move, a New York court this week dealt a heavy blow to cryptocurrency industry giant Tether for disclosing information about reserves in support of its namesake stablecoin.

Tether’s USDT token is widely used in cryptocurrency markets for trading bitcoin and other major digital assets. It is the largest stablecoin around with a market value of around $ 70 billion. But there have been long-standing questions about the quality of its asset support. Instead of publishing a formal verification of its assets, Tether provides proofs of their value.

In 2021, both Tether and cryptocurrency exchange Bitfinex paid a $ 18.5 million fine after the New York Attorney General accused them of covering “large” financial losses. “Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie,” Letitia James said at the time. Tether and Bitfinex admitted “no offense”.

The New York court ruling ignites the company once again. A lawsuit, filed in the United States District Court for the Southern District of New York in June 2019, alleges that Tether and Bitfinex shared false information about the stablecoin tether and are involved in market manipulation. Tether called the case unfounded.

This week, Judge Katherine Polk Failla ordered Tether and Bitfinex to produce information in line with the plaintiffs’ requests, describing the documents as “undoubtedly important, as they relate to the support of tether and cryptocurrency transactions.”

“A court has now weighed in and said you have to turn over these documents to prove you were supported the way you said you were. It’s no longer a favor, it’s a choice you don’t have, “said CEO of blockchain company R3 Charley Cooper.

Bitfinex declined to provide comment on the court ruling. Tether said the court ruling was a “routine discovery order and in no way confirms the plaintiffs’ baseless claims.” The company added that it has already agreed to produce documents “sufficient to build reservations in support of the USDT, and this dispute was simply about the scope of the documents to be produced.”

In August, Tether said it will focus on moving quarterly to monthly attestations, working with auditing firm BDO Italia. The company also said this was the “next step in the company’s journey to a full audit”.

Meanwhile, the court’s decision also comes at a time when a draft stablecoin law has been negotiated by Congressman Patrick McHenry (RNC) and Congressman Maxine Waters (D-CA), who serves as chairman of the House Commission on Financial Services.

According to a copy of the draft law seen by the Financial Times, regulators would consider an issuer’s ability to hold reserves of tokens “at least on a one-to-one basis” in any application to operate in the United States. And reserves should include assets such as US currency, treasury bills, repurchase agreements, and central bank reserve deposits. Code- and algorithm-supported stablecoins, similar to the now infamous Terra stablecoin that has imploded, would be out of the ordinary.

“It reflects the widely held view among regulators and lawmakers that there are too many risks in the industry and that you shouldn’t rely on the industry to self-regulate,” said Charlie Steele, former US government attorney and now partner. of Forensic Risk Alliance, a regulatory consulting firm.

People familiar with the bill say the bill is unlikely to become law this year, with one person suggesting it would require “an act of God.” However, the draft informs how the 118th Congress – which will be elected in November – will move closer to regulating stablecoins.

“Instead of starting over after the semifinals, we are already somewhere in the game. It’s serious to the extent that it will serve as a framework around stablecoins next year, ”says Cooper.

[email protected]

Leave a Comment