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A U.S. lawmaker has introduced a bill that could bring an end to the era of unregulated stablecoin use in the country. Known as the STABLE Act, it will treat stablecoin issuers as banks, requiring them to obtain a banking charter and abide by all the current banking regulations.
The Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act was introduced in U.S. Congress by Michigan Democrat Rep. Rashida Tlaib, along with Reps. Jesús Garcia and Stephen Lynch. In a press release, the lawmakers said they were seeking to protect consumers from risks posed by emerging digital payment systems such as Facebook’s Libra and stablecoins.
The STABLE Act will require that any stablecoin issuer:
- Obtains a banking charter.
- Follows the appropriate banking regulations under the existing regulatory jurisdictions.
- Notify and obtain approval from the Federal Reserve, the Federal Deposit Insurance Corporation and other banking regulator six months prior to issuing the stablecoin.
- Obtain FDIC insurance or maintain reserves at the Fed to ensure that its stablecoins can be readily converted into USD on demand.
Tlaib described the Act as “getting ahead of the curve” in protecting consumers against digital currency crimes. She believes that because of the pandemic, U.S. citizens have been making riskier financial decisions. As such, it’s the responsibility of Congress to shield them from dangers that can stem from unregulated stablecoin issuance.
Garcia reiterated the stance, adding, “That’s why I’m proud to introduce the STABLE Act […] to ensure that new financial tools like stablecoins have proper oversight and protections. Congress must ensure that new financial technologies and payment tools do not prey on vulnerable users. The STABLE Act does just that—it embraces innovation while also protecting consumers.”
The legislators singled out Facebook’s Libra as one of the stablecoins that pose great danger if left unregulated. They stated that Facebook has attempted to take advantage of the financial exclusion and gap in the market. As CoinGeek reported, Facebook intends on launching Libra in 2021 despite the continued regulatory hurdles.
The three also cited JP Morgan, Apple and PayPal/Venmo as some of the other players who have dipped their feet into the stablecoin industry.
Many in the digital currency industry have voiced their criticism at the STABLE Act. Jeremy Allaire, the CEO of Circle Internet Financial took to Twitter where he termed the Act as “a huge step backwards.” Allaire’s company is the issuer of the USD Coin (USDC) stablecoin, the second largest after Tether.
Tether is a controversial cryptocurrency with tokens issued by Tether Limited. It formerly claimed that each token was backed by one United States dollar, but on 14 March 2019 changed the backing to include loans to affiliate companies. The Bitfinex exchange was accused by the New York Attorney General of using Tether’s funds to cover up $850 million in funds missing since mid-2018.
Tether is called a stablecoin because it was originally designed to always be worth $1.00, maintaining $1.00 in reserves for each tether issued. Nevertheless, Tether Limited states that owners of tethers have no contractual right, other legal claims, or guarantee that tethers will be redeemed or exchanged for dollars. On 30 April 2019 Tether Limited’s lawyer claimed that each tether was backed by only $0.74 in cash and cash equivalents.
Tether Limited and the tether cryptocurrency are controversial because of the company’s failure to provide a promised audit showing adequate reserves backing tether, its alleged role in manipulating the price of bitcoin, the unclear relationship with the Bitfinex exchange, and the company’s apparent lack of a long-term banking relationship. Author David Gerard was quoted by the Wall Street Journal saying that Tether “is sort of the central bank of crypto trading … [yet] they don’t conduct themselves like you’d expect a responsible, sensible financial institution to do.” Tether’s price decreased to lows of $0.90 on 15 October 2018 on speculation that investors are losing faith in the token. On 20 November 2018, Bloomberg reported that U.S. federal prosecutors are investigating whether Tether was used to manipulate the price of bitcoin. In 2019, Tether surpassed Bitcoin in trading volume with the highest daily and monthly trading volume of any cryptocurrency on the market.
Research by John M. Griffin and Amin Shams in 2018 suggests that trading associated with increases in the amount of tether and associated trading at the Bitfinex exchange account for about half of the price increase in bitcoin in late 2017.
Reporters from Bloomberg, checking out accusations that tether pricing was manipulated on the Kraken exchange, found evidence that these prices were also manipulated. Red flags included small orders moving the price as much as larger orders, and “oddly specific order sizes—many going out to five decimal points, with some repeating frequently.” These oddly sized orders might have been used to signal wash trades in automated trading programs, according to New York University Professor Rosa Abrantes-Metz and former Federal Reserve bank examiner Mark Williams.
According to Tether’s website tether can be newly issued, by purchase for dollars, or redeemed by exchanges and qualified corporate customers excluding U.S.-based customers. Journalist Jon Evans states that he has not been able to find publicly verifiable examples of a purchase of newly issued tether or a redemption in the year ending August 2018.
JL van der Velde, CEO of both Bitfinex and Tether, denied the claims of price manipulation: “Bitfinex nor Tether is, or has ever, engaged in any sort of market or price manipulation. Tether issuances cannot be used to prop up the price of bitcoin or any other coin/token on Bitfinex.”
Subpoenas from the U.S. Commodity Futures Trading Commission were sent to Tether and Bitfinex on 6 December 2017. Tether’s former auditor, Friedman LLP, has also been issued a subpoena. Noble Bank in Puerto Rico was reportedly handling dollar transfers for Tether. Noble, in turn, used the Bank of New York Mellon Corporation as its custodian. As of October 2018, Nobel Bank has put itself up for sale and reportedly no longer has banking relationships with Tether, Bitfinex, or Bank of New York Mellon. Though Bitfinex lacks the banking connections to accept dollar deposits, it has denied that it is insolvent.
Tether announced a new banking relationship with Bahamas-based Deltec Bank in November 2018, releasing a letter, purportedly from Deltec, that said it had $1.8 billion on deposit with the bank. The letter was two paragraphs long and signed with an illegible squiggle, without a printed author’s name. A Deltec spokesperson declined to confirm the information in the letter to Bloomberg reporters.
Some studies have argued that use of Tether in trading on online cryptocurrency exchanges has resulted in arbitrage trading strategies between countries. In fact, it has even been thought that arbitrage trading of Tether in countries of low Bitcoin premium to high Bitcoin premium accounts for up to 80% of all Bitcoin returns on these exchanges.
It may not end BTC but it sure as hell will punch a huge hole in its price.