If you follow the cryptocurrency scene, by now you’ll have heard about Tether’s settlement with the New York Attorney General’s office.
The settlement marks a big win for stablecoin users. For the next two years, Tether will be required to live up to some of the same regulatory standards as its licensed stablecoin competitors. That means tether (USDT) stablecoins will be safer for the public to use.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
It might even be good for Tether, too. Of late, the company’s blistering growth has been slowing – the market just doesn’t seem to trust it. Some oversight might alter its trajectory.
For those who aren’t aware of either Tether or its settlement with the New York Attorney General, here’s a quick introduction. Tether’s self-named stablecoin is the largest in the cryptocurrency universe, with some $35 billion tethers in circulation.
The New York Attorney General’s office launched an investigation into Tether in 2019 for fraud. After months of picking through Tether documents, it finally settled with Tether last month.
In the settlement agreement, the Attorney General accuses Tether of being dishonest with customers by describing tether stablecoins as fully backed by dollars. Rather than keeping customer funds safely invested in dollars “safely deposited in our bank accounts,” Tether routinely diverted customer funds towards an assortment of risky assets. These included a potentially non-recoverable claim on Crypto Capital Corp, a fraudulent third-party payments processor, and a risky loan to an affiliate company, Bitfinex. Tether even deposited millions of dollars of customer money into a Bank of Montreal account held in its lawyer’s name.
These misrepresentations would be less concerning if Tether was just a tiny run-of-the-mill payments company. It isn’t. Consider this. Fintech behemoth PayPal had around $35 billion in customer balances at the end of 2020. Tether says it hit the $35 billion mark this month. That means it has accomplished in just seven years what took PayPal 23 years.
So Tether, a company that seems to be held together with spit and duct tape, has suddenly become one of the largest U.S. dollar payments platforms in the world ranked by customer balances.
No one ever worries about PayPal dollars falling below $1. But speculation that Tether could break its peg is routine in the crypto community. People have good reason to trust the stability of PayPal dollars. PayPal is regulated on a state-by-state level as a money transmitter. Tether is unregulated. That is, it is not beholden to any financial regulatory framework.
For instance, PayPal could never have lent its customers’ funds to a dodgy third-party payments processor. If it did, it would have been breaking the law. As part of its licensing requirements, PayPal is prohibited from investing customer funds in risky assets. If it did make an illegal investment, PayPal couldn’t hide it. It is required to regularly submit audited financial statements to state financial supervisors.
For its part, Tether is incorporated in the British Virgins Islands, which does not have a financial regulatory framework for protecting customers of money transmitters. And so Tether can do things that PayPal can’t.
But the settlement changes this. It requires Tether to provide customers with plenty of useful information about how it invests their money. Specifically, each quarter Tether will have to inform the public about the percentage of reserves that are held as cash,…