Stablecoins: Tether, Libra, the President’s Working Group, the IMF

To regulators, the word “stablecoin” means either Tether — a dollar-substitute token for the crypto traders who can’t get actual dollars — or it means Facebook’s Libra — a large company issuing its own private currency.

Libra fell flat on its face, and the new plan, Diem, isn’t happening. But the regulators and central banks worry seriously that someone less arrogantly incompetent than Facebook will try doing a private general currency.

Tether isn’t that sort of worry. To some extent, Tether has been unfairly tarred with the same brush as Libra. Though it brings plenty of its own worries — and claiming to be a $70 billion force in the market gets a special sort of close attention.

 

 

President’s Working Group stablecoin report

I mentioned the President’s Working Group report on stablecoins last week, in the context of Facebook Libra/Diem-style “global stablecoins.” [press release; report, PDF]

But the other stablecoin that worries regulators is, of course, Tether. There’s something about numbers like “seventy billion dollars” that catches the eye.

There is reasonable question as to how much of that is real dollars. Tether now claims $15 billion of actual cash and treasuries in their backing.

But we know Tether has lied and lied and lied in the past — it’s extensively documented in the CFTC and New York settlements, just for starters — and, as Dan Davies noted in 2004: [blog post]

There is no fancy Latin term for the fallacy of “giving known liars the benefit of the doubt”, but it is in my view a much greater source of avoidable error in the world.

The stablecoin report is about Tether, because it goes around shouting about its $70 billion reserve. But it’s also about Facebook, who are how the word “stablecoin” became part of the regulator’s vocabulary.

Who regulates stablecoins? The SEC, maybe

Gary Gensler has suggested to the Treasury that the SEC become the regulator for stablecoins in the US. [Bloomberg]

The basis for putting stablecoins under SEC regulation is that many stablecoins look very like money market funds — Tether certainly does, for example, and Gensler had previously compared Libra to a money market fund. (Libra Shrugged, chapter 10.)

This looks a bit like a bureaucratic ambit claim. Remember that the CFTC asserted that stablecoins were commodities, and so Tether was in their jurisdiction.

But I think Gensler will be taken seriously — because he used to run the CFTC, and is deeply familiar with who regulates what and how things work, and should work.

Circle, the issuer of popular trading stablecoin USDC, was subpoenaed by the SEC in July, and we all failed to notice when they filed about it in August. CoinDesk wrote it up in early October. I wonder what the subpoena could have been about? [CoinDesk]

IMF: Global Financial Stability Report

The International Monetary Fund (IMF) issued a Global Financial Stability Report in October. Its subtitle is “COVID-19, Crypto, and Climate: Navigating Challenging Transitions.” [press release; report, PDF]

The introduction mentions that markets are “growing rapidly” — i.e., we’re in a bubble — and prices are volatile.

More worryingly, “the volume of crypto asset transactions has reached macro critical levels in some emerging markets, often as high as those of domestic equities.” Phrases like “macro critical levels” are what central bankers say when they’re sounding the air-raid sirens.

The IMF’s prescription is:

A sound regulatory framework for crypto assets, and decentralized finance markets more generally, must be a priority on the global policy agenda. This is particularly pressing for stablecoins, for which some business models have been subject to the risk of sudden and severe liquidity pressures.

Chapter 2 is all about crypto. The risks the report outlines are exposure (market contagion) — cryptos go bad and affect the real economy — and stablecoins. And maybe DeFi:

In the future, a widely used stablecoin or DeFi service with a reach and use across multiple jurisdictions could scale up quickly and become systemically important.

The words “systemically important” should be read as “must absolutely be regulated to the hilt.”

There is considerable discussion of the lack of regulation and supervision in the stablecoin market. The report mentions the June 2021 price collapse of Iron.finance’s Titan governance token as an example of the sort of thing that happens in stablecoins. On regulation, the IMF says:

Nonregulated: No prudential or conduct regulation of stablecoin arrangements. Many regulators are still in the process of developing applicable regulations, as many stablecoins currently fall into this category. Some US dollar stablecoin issuers that have chosen to be headquartered offshore and operate through offshore banks are nonregulated.

That last sentence means Tether, but Tether also gets called out by name. Tether is a centralised systemic risk, as issuer of such a large percentage of circulating stablecoins. Tether’s lack of audits is mentioned. A Tether collapse risks contagion to the wider crypto market.

The recommendations — the sharp end of this report — are:

(1) regulation, supervision, and monitoring of the crypto ecosystem; (2) stablecoin-specific risks; and (3) managing the macro-financial risks in emerging market and developing economies.

The IMF suggests regulating the heck out of this crypto nonsense, in a manner not susceptible to regulatory arbitrage — another phrase the IMF drops a whole lot.

BIS, IOSCO: Application of the Principles for Financial Market Infrastructures to stablecoin arrangements

The Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO), have published a report on stablecoin arrangements. They’re calling for comments. [press release; report, PDF]

The report is aimed at regulators and prospective stablecoin issuers — it “confirms and clarifies that stablecoin arrangements should observe international standards for payment, clearing and settlement systems.” There are existing rules, and you need to conform to them.

The report manages to contain none of the words “Tether,” “Libra” or “Diem.” It’s really about the threat of future Libra-like stablecoins, though.

The PDF is only 22 pages, but it’s utterly opaque unless you understand that it’s about Libra’s wild plans, and that regulators and central banks considered these plans a serious threat. It relies heavily on freshly-coined jargon from previous central bank papers on the threats from Libra-like global stablecoins.

But every time it says “may” and “should,” you should read it as “must” and “shall.”

A footnote notes that the Financial Stability Board defines a “global stablecoin” as “a widely adopted stablecoin with a potential reach and use across multiple jurisdictions” — they mean Libra, or a Libra-like.

But the summary is: they hate this stuff, and it will be regulated tightly — as anything that provokes central banks to use the phrase “systemically important” this much needs to be.

Comments should be in by 1 December.

Tether goes nuts

What happens next? Well, Tether’s issued 3 billion USDT in just the past week — backed by hot air, or maybe magic beans. Who knows?

The tethers were pumped straight into the Bitcoin price, reaching an all-time high of $69,000 — precisely — on Coinbase BTC/USD around 14:00 UTC today!

I think Tether feels the regulatory screws tightening, so they’re going all-out while they can. The regulators are absolutely coming for stablecoins — but the regulators move paralysingly slowly.

Who’s buying all the tethers? Protos went through all the blockchains Tether runs on, and tracked down the buyers as best it could. Mostly it’s FTX and DRW. [Protos]

Can Tether keep going? Sure they can — until someone stops them, or the crypto market stops believing tethers are worth a dollar.

Number go up — but I suggest that the current high Bitcoin price may be made of hot air. That’s why it crashed to $64,000 a few hours later. Trade carefully.