Tether isn\u2019t 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<\/a> \u2014 and claiming to be a $70 billion force in the market gets a special sort of close attention.<\/p>\n <\/p>\n <\/p>\n I mentioned the President\u2019s Working Group report on stablecoins<\/a> last week, in the context of Facebook Libra\/Diem-style “global stablecoins.” [press release<\/i><\/a>;<\/i> report<\/i><\/a>, PDF<\/i>]<\/p>\n But the other stablecoin that worries regulators is, of course, Tether. There\u2019s something about numbers like \u201cseventy billion dollars\u201d that catches the eye.<\/p>\n There is reasonable question as to how much of that is real dollars. Tether now claims $15 billion of actual cash and treasuries<\/a> in their backing.<\/p>\n But we know Tether has lied and lied and lied in the past \u2014 it\u2019s extensively documented in the CFTC<\/a> and New York<\/a> settlements, just for starters \u2014 and, as Dan Davies<\/a> noted in 2004: [blog post<\/i><\/a>]<\/p>\n 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.<\/p><\/blockquote>\n The stablecoin report is about Tether, because it goes around shouting about its $70 billion reserve. But it\u2019s also about Facebook, who are how the word \u201cstablecoin\u201d became part of the regulator\u2019s vocabulary.<\/p>\n Gary Gensler has suggested to the Treasury that the SEC become the regulator for stablecoins in the US. [Bloomberg<\/i><\/a>]<\/p>\n The basis for putting stablecoins under SEC regulation is that many stablecoins look very like money market funds \u2014 Tether certainly does, for example, and Gensler had previously compared Libra to a money market fund. (Libra Shrugged,<\/i><\/a> chapter 10.)<\/p>\n This looks a bit like a bureaucratic ambit claim. Remember that the CFTC asserted that stablecoins were commodities,<\/a> and so Tether was in their jurisdiction.<\/p>\n But I think Gensler will be taken seriously \u2014 because he used to run the CFTC, and is deeply familiar with who regulates what and how things work, and should work.<\/p>\n 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<\/i><\/a>]<\/p>\n The International Monetary Fund (IMF) issued a Global Financial Stability Report in October. Its subtitle is \u201cCOVID-19, Crypto, and Climate: Navigating Challenging Transitions.\u201d [press release<\/i><\/a>; report, PDF<\/i>]<\/p>\n The introduction mentions that markets are \u201cgrowing rapidly\u201d \u2014 i.e.,<\/i> we\u2019re in a bubble \u2014 and prices are volatile.<\/p>\n More worryingly, \u201cthe volume of crypto asset transactions has reached macro critical levels in some emerging markets, often as high as those of domestic equities.\u201d Phrases like \u201cmacro critical levels\u201d are what central bankers say when they\u2019re sounding the air-raid sirens.<\/p>\n The IMF\u2019s prescription is:<\/p>\n 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.<\/p><\/blockquote>\n Chapter 2 is all about crypto. The risks the report outlines are exposure (market contagion) \u2014 cryptos go bad and affect the real economy \u2014 and stablecoins. And maybe DeFi:<\/p>\n 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.<\/p><\/blockquote>\n The words \u201csystemically important\u201d should be read as \u201cmust absolutely be regulated to the hilt.\u201d<\/p>\n 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\u2019s Titan governance token<\/a> as an example of the sort of thing that happens in stablecoins. On regulation, the IMF says:<\/p>\n 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.<\/p><\/blockquote>\n 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\u2019s lack of audits is mentioned. A Tether collapse risks contagion to the wider crypto market.<\/p>\n The recommendations \u2014 the sharp end of this report \u2014 are:<\/p>\n (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.<\/p><\/blockquote>\n The IMF suggests regulating the heck out of this crypto nonsense, in a manner not susceptible to regulatory arbitrage \u2014 another phrase the IMF drops a whole lot.<\/p>\n The Bank for International Settlements\u2019 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<\/i><\/a>; <\/i>report<\/i><\/a>, PDF<\/i>]<\/p>\n The report is aimed at regulators and prospective stablecoin issuers \u2014 it \u201cconfirms and clarifies that stablecoin arrangements should observe international standards for payment, clearing and settlement systems.\u201d There are existing rules, and you need to conform to them.<\/p>\n The report manages to contain none of the words \u201cTether,\u201d \u201cLibra\u201d or \u201cDiem.\u201d It\u2019s really about the threat of future Libra-like stablecoins, though.<\/p>\n The PDF is only 22 pages, but it\u2019s utterly opaque unless you understand that it\u2019s about Libra\u2019s 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.<\/p>\n But every time it says \u201cmay\u201d and \u201cshould,\u201d you should read it as \u201cmust” and \u201cshall.\u201d<\/p>\n A footnote notes that the Financial Stability Board defines a \u201cglobal stablecoin\u201d as \u201ca widely adopted stablecoin with a potential reach and use across multiple jurisdictions\u201d \u2014 they mean Libra, or a Libra-like.<\/p>\n But the summary is: they hate this stuff, and it will be regulated tightly \u2014 as anything that provokes central banks to use the phrase \u201csystemically important\u201d this much needs to be.<\/p>\n Comments should be in by 1 December.<\/p>\n What happens next? Well, Tether\u2019s issued 3 billion USDT in just the past week \u2014 backed by hot air, or maybe magic beans. Who knows?<\/p>\n The tethers were pumped straight into the Bitcoin price, reaching an all-time high of $69,000 \u2014 precisely \u2014 on Coinbase BTC\/USD around 14:00 UTC today!<\/p>\n I think Tether feels the regulatory screws tightening, so they\u2019re going all-out while they can. The regulators are absolutely coming for stablecoins \u2014 but the regulators move paralysingly slowly.<\/p>\n Who\u2019s buying all the tethers? Protos went through all the blockchains Tether runs on, and tracked down the buyers as best it could. Mostly it\u2019s FTX and DRW. [Protos<\/i><\/a>]<\/p>\n Can Tether keep going? Sure they can \u2014 until someone stops them, or the crypto market stops believing tethers are worth a dollar.<\/p>\n![\"\"](\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/01\/bank-of-brest-three-dollar-bill.jpg\")
<\/a><\/p>\nPresident\u2019s Working Group stablecoin report<\/h3>\n
Who regulates stablecoins? The SEC, maybe<\/h3>\n
IMF: Global Financial Stability Report<\/h3>\n
BIS, IOSCO: Application of the Principles for Financial Market Infrastructures to stablecoin arrangements<\/h3>\n
Tether goes nuts<\/h3>\n
![\"Become](\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/10\/become_a_patron_button.svg\" "\\"Become")
<\/a>