Markedly few details emerged initially from last week’s meeting of the President’s Working Group on Financial Markets over the “rapid growth of stablecoins” — digital tokens pegged to traditional currencies such as the dollar. Several days on, a handful of data points are taking shape.
The meeting focused on blockchain token company Tether’s claims that it holds a significant amount of commercial paper — debt that companies issue to meet their short-term funding needs, Bloomberg reported Tuesday, citing anonymous sources.
The wire service reported a day earlier that the Justice Department is investigating whether executives behind the token committed bank fraud at some point in the company's past by hiding from partner banks that transactions were linked to cryptocurrency, according to three sources. Federal prosecutors have sent letters to individuals in recent months, informing them they’re targets of the investigation, one source said.
At times, Tether has been accused of playing fast and loose with its math. Tether and the cryptocurrency exchange Bitfinex agreed to pay $18.5 million in February to settle allegations they hid the loss of hundreds of millions of dollars in commingled client and corporate funds and lied about their reserves, New York's attorney general's office said. The state found that Tether was, at one point, just 74% backed by cash and short-term securities, according to Bloomberg. As part of the settlement, Tether agreed to give state officials two years’ worth of quarterly reports detailing the composition of Tether's reserves by type and percentage, and to release the reports publicly.
Commercial paper made up about half of Tether’s roughly $60 billion in reserves as of March, a company presentation showed, according to Bloomberg. That would make Tether the world’s seventh-biggest holder of commercial paper, a JPMorgan Chase strategist wrote in May.
The fear from regulators is that a sudden, en-masse exit of investors backing the debt could prove a destabilizing factor. Investor pullout from money-market funds in March 2020 heightened panic in a market already reeling from the onset of the COVID-19 pandemic.
Regulators are checking to see that Tether’s commercial paper load is backed dollar-for-token, Acting Comptroller of the Currency Michael Hsu told Bloomberg.
Tether downplayed Monday’s report of the DOJ investigation. “Tether routinely has open dialogue with law enforcement agencies, including the U.S. Department of Justice, as part of our commitment to cooperation, transparency, and accountability,” it said in a statement to CNBC.
As for the commercial paper concerns, Tether said in a statement seen by Bloomberg, “We are pioneers in this industry, which is all very new … We are not just keeping up with new rules, but helping shape them.”
Diem still on the radar
A second focus of last week’s working-group meeting, Bloomberg reported, is Diem — an entity whose potential widespread adoption has made lawmakers and regulators skittish since Facebook and more than 20 other backers laid out a vision in 2019 for a token backed by a global basket of currencies.
The project faced pushback from government officials in the U.S. and Europe, who cited privacy issues and warned the currency would become a target for money laundering and terrorist financing. Diem scaled down its ambitions, aiming, as of May, to register as a money services business with the Financial Crimes Enforcement Network (FinCEN) and run a blockchain-based payment system that allows the real-time transfer of U.S. dollar-backed stablecoins.
Treasury Secretary Janet Yellen, who led last week’s working-group meeting, "underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place" regarding stablecoins, the Treasury Department said in a statement.
Sen. Elizabeth Warren, D-MA, used the same language Tuesday in a letter to Yellen. “[The Financial Stability Oversight Council] must act quickly to use its statutory authority to address cryptocurrencies’ risks and regulate the market to ensure the safety and stability of consumers and our financial system,” Warren wrote. “As the demand for cryptocurrencies continues to grow and these assets become more embedded in our financial system, consumers, the environment, and our financial system are under growing threats.”
The Yellen-led FSOC has the capacity to label stablecoins and its issuers as systemically important, which would put affected parties under the Federal Reserve’s purview. Stablecoins have surpassed $100 billion in market value, with Tether accounting for about 60% of that, Reuters reported.
In her letter, Warren listed five risks she sees stemming from an under-regulated crypto market: exposure to hedge funds, risks to banks, risks from decentralized finance, threats that stablecoins pose and the role of crypto in cyberattacks.
The letter came on a day the Senate Banking Committee held a hearing on the merits and dangers of cryptocurrencies, prompting starkly opposing views from lawmakers on either side of the political aisle.
"The last thing we should do is regulate these innovators into oblivion," Sen. Steve Daines, R-MT, said at the hearing, according to American Banker.
Warren, meanwhile, said, “All the warning signs are flashing — the hype, the volatility, the wild claims that turn out to be false." “Regulators need to do their job and step in before it's too late,” she added.
Changes coming at Binance
While regulators are being urged to act quickly, some companies in the digital asset space are heeding that advice. Crypto exchange Binance is searching for a new CEO, founder Changpeng Zhao said Tuesday in a conference call, according to Bloomberg.
The company aims to appoint compliance experts as regional CEOs, Zhao said, and — in a move away from its long-running status as a decentralized organization — to establish multiple headquarters around the world. The company is also applying for licenses “everywhere,” Zhao said, according to the wire service.
Binance drew flak last month when the U.K.’s leading regulator, the Financial Conduct Authority, ordered the exchange to stop all regulated activities in Britain. Still, some of its affiliates have been hiring compliance experts in the C-suite.
Former Acting Comptroller of the Currency Brian Brooks joined Binance.US as CEO on May 1 and he, in turn, hired Manny Alvarez, former commissioner of California’s Department of Financial Protection and Innovation, to oversee risk, compliance and Binance.US’s legal function.
“Longer term, playing within the rules, 100% compliant, it’s much better to play within the confines of that,” Zhao said Tuesday. “That trade-off is very, very clear.”