Is the US congress about to kill Bitcoin?

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Will Bitcoin destroy the US dollar?

Via Coingeek:

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[1] cryptocurrency with tokens issued by Tether Limited.[2] 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.[3][4] 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.[5][6]

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.[7] 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.[4] On 30 April 2019 Tether Limited’s lawyer claimed that each tether was backed by only $0.74 in cash and cash equivalents.[8][9]

Tether Limited and the tether cryptocurrency are controversial because of the company’s failure to provide a promised audit showing adequate reserves backing tether,[10][2] its alleged role in manipulating the price of bitcoin,[11] the unclear relationship with the Bitfinex exchange, and the company’s apparent lack of a long-term banking relationship.[12] 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.”[12] Tether’s price decreased to lows of $0.90 on 15 October 2018 on speculation that investors are losing faith in the token.[13] On 20 November 2018, Bloomberg reported that U.S. federal prosecutors are investigating whether Tether was used to manipulate the price of bitcoin.[1] In 2019, Tether surpassed Bitcoin in trading volume with the highest daily and monthly trading volume of any cryptocurrency on the market.[14]

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.[29][11][23]

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.[30]

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.[31]

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.”[32]

Subpoenas from the U.S. Commodity Futures Trading Commission were sent to Tether and Bitfinex on 6 December 2017.[21] Tether’s former auditor, Friedman LLP, has also been issued a subpoena.[33] Noble Bank in Puerto Rico was reportedly handling dollar transfers for Tether.[34] 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.[35] Though Bitfinex lacks the banking connections to accept dollar deposits, it has denied that it is insolvent.[7]

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.[36]

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.[37]

It may not end BTC but it sure as hell will punch a huge hole in its price.

David Llewellyn-Smith
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Comments

  1. kierans777MEMBER

    After all, how can the Fed keep debasing the currency, destroy what’s left of the middle class, and pump massive asset bubbles that see the 1% get further ahead and cause the continue social and political unrest that is leading to the Trump effect if people have a viable currency alternative. LOL

    • Exactly, my thoughts are any attempts to regulate currency such as BTC will just drive its adoption faster and the debasement of fiat even further.

  2. Ok, so who is the issuer of bitcoin that this legislation is going to impact?
    A truly trustless system like bitcoin has no issuer to require to be registered.
    This seems far more likely to impact all the wannabees trying to cash in on bitcoins success.

      • Stewie GriffinMEMBER

        Yup – Tether provides up to 85% of all crypto liquidity for people wanting to move out of crypto exposure onto fiat/stable coin exposure. Less than 15% of all combined exchange liquidity is actual real USD trading.

        If you are trading crypto make sure that you use an exchange with access to real fiat currency trading and that you never trade Tether pairs or end up holding it.

        • I uise coinspot. How do I check?

          I deposit real dollars and when I sell account shows balance in aud.

          • Well, if you are depositing real dollars it has access to real fiat currency trading. Basically if you are trading AUD to crypto on a site with AU banking connection you aren’t having anything to do with tether despite all the scaremongering around here. I believe Australian crypto exchanges have significant local regulation given the acceptance of crypto by local authorities.

          • Stewie GriffinMEMBER

            Coinspot was bought by US exchange Kraken, which run both USD fiat and USD Tether pairs. However, anything on an AUD cross should be legit fiat, as I’m not aware of any AUD stable coins. It should all be in the T&C’s of the exchange as well.

          • @BJW,

            There is no formal regulation in Australia of crypto exchanges outside of AUSTRAC mandating them as designated entities which are requires to report AML/CTF concerns. RBA, ASIC and APRA have no governance on them outside of the corporations act.

          • @Gareth,
            So as trustworthy as any other company then. Or moreso than real estate agents given they are exempt from AML…

          • Indeed @BJW and @Niko. APRA would throw a wet lettuce at them all while billions in laundered money enters the real estate markets. #straya

      • Bitcoin is an entirely distributed block chain – I wish more people would understand the basics. I see so many people trading Bitcoin who literally have zero idea on its infrastructure beyond a ten minute read.

        This legislation would be like the US government trying to regulate basic Algebra or claiming dominion over binary code – in the very same league as the Australian governments laws regarding encryption – a very DEEP lack of basic understanding on how things work.

        • Stewie GriffinMEMBER

          The majority of the Hash is provided by commercial miners who exist in the real world – if the authorities required them to do something, and they refuse, then their billions of dollars of investment could be at risk. If BTC was then pushed to small nodes for their mining, then there would be no hash security and they’d easily be subject to multiple 51% attacks.

          Bitcoin was never meant to operate outside of the law, infact it has been specifically designed to operate inside the law – as many drug dealers and hackers are now finding out.

  3. Stewie GriffinMEMBER

    IMHO this STABLE Act is a good long term move towards legitimately incorporating crypto into the financial system. Essentially these ‘stablecoins’ have the appearance of a regular old fashion US money market fund – the ones that had an obligation to ‘never break the buck’ which they famously did during the GFC. However in the short term it could well be devastating.

    At the start of the year Tether had a market capitalisation of around $4b, since then it has grown by 500% to just under $20bn:

    https://wallet.tether.to/transparency

    The problem with Tether is that it is like a Push-me-Pull-a-Mule climbing a mountain, which all hinges on the fact that part of its reserves are in “other assets” most likely other crypto currencies, with an admitted ratio as low as 70% in terms of actual cash.

    What happens is that as BTC price is pumped, for whatever reason (and in a liquidity constrained system the price can be pump quite easily) then Tether’s reserves will change in value, the component that they have allocated to crypto starts appreciating, and they become over capitalised – allowing them to sell down crypto reserves in the rising market and increasing their cash component, gradually allowing them to decrease their crypto reserves and increase their genuine cash reserves.

    For example at the start of the year with a 70/30 split in reserves between cash and BTC and a market capitalisation of $4bn, Tether would have had cash reserves of $2.8bn and BTC reserves of $1.2bn. The BTC price was around $7000, which would have translated into around 170k BTC. However by mid Feb the price of BTC had risen to $10,000 and those 170k BTC would now be worth $1.7bn, some 500m increase, which they would have converted to cash. So now their reserves would be something like this 83% cash at $3.3bn and 13% BTC of worth $700m made up by 70k BTC worth $10k each.

    So that when a correction does occur, Tether are then free to start buying up falling BTC with genuine hard cash, and gradually turning their reserves back around again, increasing crypto component and decreasing the cash component. Imagine two climbers climbing up a mountain, BTC is racing ahead pulling Tether’s reserves up, while Tether is there securely anchored at the end of the rope, ready to stop BTC falling.

    The Crypto market did just that in March during the midst of the pandemic financial panic BTC fell as low as $3850. Who knows what Tether’s actual true reserves were prior to this or even post this event – the truth is no one knows. But since that time the price of BTC has pumped to $20k – if Tether had its 70/30 ratio deployed at the low (and who knows without independent verification why couldn’t it be as low as 50/50?) then they would have soaked up around 300k BTC – a huge downward liquidity sponge. Those 300k BTC would have only been worth $1.2bn in March at the low, yet by now those BTC reserves (assuming they will held them all and hadn’t been busy offloading them in the interval), would be now worth $6bn.

    For anyone who is interested I found this site the other day. While I can make no claim as to its veracity, it claims to monitor the change in identified BTC wallets, between whale wallets, exchange wallets and small wallets…. the movement in terms of BTC between these wallets over recent months has been quite telling:

    https://app.flipsidecrypto.com/cooperative/bitcoin

    You can see the same chart expression with Tether wallets and the growth in terms of value locked into these wallets as the sellers in the previous chart deposit the proceeds of their distribution into their Tether Wallet:

    https://app.flipsidecrypto.com/cooperative/tether

    IMHO it looks like distribution.

    • FHBWannabeMEMBER

      I agree, this act would legitimise cryptocurrencies and would essentially give the green light to any/all fence-sitters that always wanted to get into the crypto space but never fit their risk profile. A bit like BNPL getting the attention of regulators. Sure, some providers will hurt in the short term to comply, but in the end it will be a win and boon for investors.

    • Fascinating Stewie.
      It took me some time to work out that the infographic was changing daily. A bit slow I guess.

      If this is a correct infographic (noting it may not be however the data to produce these charts is freely available) you’d have to think that the whales have set BTC up for a massive dump.

      On Tether, I think it and other stable coins have been deliberately permitted by TPTB to test a real world use case for digital fiat.

      Now its tested and has shown that it is a great medium of exchange, a good (in fiat terms) store of value and most importantly that it requires nothing to back it up – or less than 100% of of something (USD) that itself is back by nothing (USD) – then central banks will proceed and issue their own digital fiat.

      What has fascinated me about Tether and their peers (I hold them briefly to move between exchanges or cryptos) is that you don’t need a USD bank account to hold any tethered digital currency.

      Having recently gone through 3 weeks of irritation with NAB to open a new AUD business bank account, the ease of digital anything versus the cumbersome rails of conventional banking should mean the transition to digital fita, IMO will be fast.

      • Stewie GriffinMEMBER

        Hi North, yup I have found the innovation that has taken place in this space to be fascinating. I agree with your that Tether and its cohort of stable coins have taken on the appearance of a Beta run for CBDC, whether or not it was planned that way or not I don’t know, but I certainly think that they’ve become the proto-type for the sort of tokenised internet money that is coming down the pipeline.

        As anyone whose paid attention to these things knows however is that the current state cannot persist for much longer – as you noted with the trouble you’ve experienced in opening a simple regular bank account, the issue wtih stable coins and online wallets is that suddenly it gives everyone the potential to access and set up their own Swiss Bank account. Obviously this is a situation that will not be allowed to persist for much longer.

        IMHO I think regulation and KYC is going to be coming to this space in a big way – simply put coins from unregulated and unidentified accounts will gradually be frozen out of the system. Already there are companies exploring options to satisfy the coming regulatory requirements in regards to KYC. e.g. Kompany or a number of others.

        • Hi Stewie,
          I think the intermediate game for the digital revolution will be crypto ID. KYC will be a function of you sending your ID token to whichever party wants to KYC you.
          This will extend to voting. If you think conspiracy theory, the Trump fraud accusation in the US in respect to paper and mail voting is the fertile ground for crypto voting.
          In an ideal world this lead to greater participation in our democracy by the proles – but I’m not holding my breath for that.

          In terms of crypto the biggest question in my mind centres on digital currency creation and distribution, which to my mind eliminates the fractional reserve banking regime. This would mean all currency is created centrally and banks would not get to create digital currency (credit) – unless there is a second tier of digital currency – think M1 and M2.

          Banks would have to vie to attract digital currency through offering to pay interest on digital deposits – how old fashioned.
          Through attractive rates, digital cash in “circulation” (sitting in digital wallets and so being ready to spend – like cash today) would be soaked up or released for spending.

          • Stewie GriffinMEMBER

            Agree on the KYC – the model that best satisfy’s the legal KYC requirements is yet to be determined, the easiest would be through nominating specific addresses. Some of the exchanges made a big song and dance about it, but really it will come down to users nominating an address that will be associated with the KYC that the exchanges have usually already collected from you, with all withdrawals from that exchange having to go through the nominated address (no different to the ‘WhiteLists’ that many exchanges already have to expediate withdrawals from their users).

            I’m very much of the opinion that in terms of the mechanics, CBDC will basically take the form of stable currencies, like Tether or USDC, etc and will end up being carried on one or even a couple of blockchains (until the inevitable rationalisation of blockchains occurs in that space) rather than their own national CB blockchain.

            In terms of the financial mechanics of how it CBDC will work – that is a whole different kettle of fish. As you say “all currency is created centrally and banks would not get to create digital currency (credit)” the impact that CBDC can have on banking and bank funding is potentially profound. I know that the most desireable outcome is that ALL credit creation reverts back to central bank control, with retail banks having to ‘bid’ for it, however…. the cynic in me, and there is a lot of cynic, is pretty sure that the existing banking players will be sure to find some way to interpose themselves into the process to ensure that they are able to continue clipping tickets. The mere fact that the 4 biggest banks in Australia also dominate our ASX – no Aust Govt is going to allow them to wither and die on their watch.

            I’ve had some interesting convo’s with Pft007 on this topic too, he posts some good articles on it occasionally over the weekend links when he comes across them.

          • Stewie GriffinMEMBER

            Ugh – that is such crap technology too – omg they are brain dead. You are right though, there is no way imho that the banks would give up their monopoly over CB deposits.

            Also right that it would it not be the end of banking, although it would be the end of the Big 4 – they would have to downsize and revert to specialised financial credit providers. Do what Banks are supposed to be best at… assessing creditworthiness, knowing your customer, etc.

            It would be bad for the big 4, but wonderful for finance in general. Where now there is just a big 4 monoculture, a myrad of financial credit providers and assessors would bloom. Adam Smith would be excited.

    • Better still buy some PAXG gold tokens.

      I owned physical allocated gold with the Perth Mint. Lucky enough to have sold near the top.

      I never saw that gold. Not sure who did. I had to take a counterparty’s word for it that it existed.
      This is exactly the same as any other vaulted gold. A counterparty must be trusted with confirming its existence and its allocation.

      The trouble is I think there are very, very few trustworthy parties about. Case in point the Perth Mint got pinged for aiding money laundering. Is the LBMA trustworthy?

      PAX is like any other gold custodian, just that the allocations are digitized tokens making it tradeable 24/7/365. Unlike the useless Perth mint site with its HORRENDOUS spreads. And the storage costs ate 50% of my gains over 3-years. Never buying from those robbers again.