For perhaps the first time since the New York Attorney General investigation into Bitfinex and Tether, regulatory agencies and governing bodies in the United States are scrutinizing the stablecoin and its reserves — and may even act to move against it.
But what could they actually do to Tether?
The Federal Reserve has words
We’ll start with the Federal Reserve — both the statements made and the actions they could take.
In May, its chair Jerome Powell said stablecoins called for increased “attention to the appropriate regulatory and oversight framework.”
Around the same time, Lael Brainard, a governor with the Fed, said “there is a risk that the widespread use of private monies for consumer payments could fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses.”
A month later, Fed governor Rosengren stated that even the term ‘stablecoin’ “is a misnomer.”
But Quarles, the Vice Chair of Supervision at the Fed had a far more nuanced perspective:
“A global U.S. dollar stablecoin network […] could be deployed much faster and with fewer downsides than a CBDC,” he stated in June.
They continued to outline several “run risks” that would undermine such a network: “If it is a fractional rather than full reserve; […] or if the pool is invested in instruments other than the most liquid possible, principally central bank reserves and short-term sovereign bonds.”
The Federal Reserve has every right to be concerned
Indeed, Tether’s reluctance to shed light on its reserves doesn’t inspire confidence. In May, Tether disclosed cash, cash equivalents, short-term deposits, and commercial paper make up 76% of its dollar-value — less than 4% is dollars in a bank.
The most controversial part of its disclosure is commercial paper, which it claims is “mostly A-2 and above graded.” But if it’s not — and its opaque disclosures suggest as much to many commentators — Tether may not be able to remain solvent and process outflows in the event it needs to cash out, speaking to an extremely high “run risk.”
The Fed can’t do much alone — but it’s got friends
Normally the Fed has a few tricks up its sleeves when it comes to regulatory action — the abilities range from formal to informal, cease-and-desist orders to supervisory letters.
None of these actions imply any ability to actually shutter a bank or business.
But that doesn’t mean the Fed is hogtied. Lately, there’s been a new worry amongst people in finance: the close-knit relationship between chairman Jerome Powell and Janet Yellen, the Secretary of the Treasury.
While monetary and fiscal control is what most people focus on when it comes to the Federal Reserve and the Treasury, this friendly affair might have alternative consequences for Tether and other stablecoins… because the Department of the Treasury does have ways to enforce laws.
Under the Treasury’s organizational umbrella lie two increasingly important regulators for stablecoins: the Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service, which has a criminal investigation division (IRS-CI).
These two entities have the ability to make arrests, shut down platforms, and generally cause havoc for anyone refusing to abide by the rules.
These aren’t the only two regulatory bodies that stablecoin operators need to think about, either.
SEC enters the chat
Seeing the way stablecoins are allocating assets in their reserves — for Tether, this includes commercial paper of unknown origin and loans secured by unknown sources — makes them similar in many ways to money market funds.
Money market funds are securities, and therefore regulated by the Securities and Exchange Commission (SEC) in the U.S.
No stablecoins are, at least officially, presenting themselves as money market funds or even dollar derivatives, but there’s at least one classic example of a ‘stablecoin’ getting busted for precisely the same reason: the 2013 seizure of Liberty Reserve’s domain by the Department of Justice.
A waiting game
The Federal Reserve, Department of the Treasury, and the SEC could all claim ownership of the stablecoin space. Tether’s prominence in the crypto market would make it an ideal target for enforcement.
But despite the growing concern from these regulatory bodies over stablecoins in general, it’s hard to determine when or even if any will make moves against them. Particularly because none have expressed a desired interest, besides the Southern District of New York’s investigation.
So really, all operators (and the public) can do is wait and see. We certainly will.