- >Here’s Why a New Congress Bill Is Bad News for Tether, Bitcoin and Crypto
Here’s Why a New Congress Bill Is Bad News for Tether, Bitcoin and Crypto
The United States Congress is coming for stablecoins. Last week, Democrats Rashida Tlaib, Jesús “Chuy” García and Stephen Lynch introduced the Stablecoin Tethering and Bank Licensing Enforcement Act. Also known as the STABLE Act, it proposes that stablecoins issuers be legally required to gain a U.S. banking charter, so as to “protect consumers from the risks posed by emerging digital payment instruments.”
Simon Chandler | Dec 7, 2020
Like so much legislation, the bill presents itself as benevolent, but it would present a massive challenge to the cryptocurrency industry. Many stablecoin issuers — and in particular Tether — would likely fail to meet the conditions demanded by a banking charter, something which would deprive the bitcoin and wider cryptocurrency market of much of the liquidity that’s boosted it in recent months (and years).
However, while the bill’s passage through Congress would strike a big blow against crypto, it has a chance of passing only if the Democrats manage to secure victory in the upcoming Georgia Senate runoff. Conversely, the bill may ultimately be a net-positive for the cryptocurrency industry in the long-run, insofar as it will provide further statutory legitimacy for the sector.
The STABLE Act Would Destabilize Stablecoins
While seemingly intended to limit the impact of Libra (now named Diem) and its stablecoin, the STABLE Act has far-reaching ramifications for all stablecoins and every stablecoin issuer.
The bill proposes four main reforms, all of which would impose stringent conditions on the stablecoin and crypto sector:
Require any prospective issuer of a stablecoin to obtain a banking charter;
Require that any company offering stablecoin services must follow the appropriate banking regulations under the existing regulatory jurisdictions;
Require that any company or bank issuing a stablecoin to notify and obtain approval from the Fed, the FDIC, and the appropriate banking agency 6 months prior to its issuance and maintain an ongoing analysis of potential systemic impacts and risks;
Require that any stablecoin issuers obtain FDIC insurance or otherwise maintain reserves at the Federal Reserve to ensure that all stablecoins can be readily converted into United States dollars, on demand.
It’s the first requirement that is likely the most dangerous for existing stablecoin issuers. Obtaining a bank charter (whether a state or national charter) requires any applicant to meet a variety of conditions, including providing full pro-forma financial statements, information on capital reserves, on senior management, on business plans, on operating structure, on risks, and so on.
Stablecoin issuers will, among other things, have to undergo a financial audit, since this is how financial statements are usually prepared. A full audit is something that Tether has never been able to produce to date, having notoriously severed ties with auditor Friedman LLP in early 2018.
And even for the stablecoin issuers who aren’t Tether, jumping through the hoops above will still be onerous. Even Tyler Winklevoss, the co-founder of regulated crypto-exchange Gemini, took the STABLE Act to task on Twitter, arguing it’s based on an “unstable rationale and premise” and that it should be a “wake up call for everyone.” He also argued in another tweet that it would make “stablecoins the exclusive purview of banks.”
Likewise, the CEO of Circle — which issues its own USDC stablecoin — also had nothing but criticism for the proposed legislation.
Bad News for Tether
It’s safe to say that stablecoin issuers are scared of the act. The wider cryptocurrency industry should also be scared, since depending on your viewpoint, stablecoins — and in particular Tether — play either a modest or very big role in boosting the bitcoin market.
As we’ve written before, university studies have suggested that Tether was largely responsible for the late-2017 bull market, while it’s also interesting to note that the stablecoin’s supply has expanded by 359% in the year to date, according to CoinGecko. Meanwhile, the price of bitcoin has jumped by 166.8%.
Assuming that the STABLE Act is passed, it could potentially spell very serious trouble for Tether. While the stablecoin is used mostly in Asia, its failure to gain a banking charter (i.e. to become a bank) could provide the U.S. government with an excuse to go after it, given that it issues a token pegged to and backed with U.S. dollars. For example, Tether’s predominance in Asia hasn’t stopped the New York Attorney General from attempting to prosecute it, so combined with violation with the STABLE ACT, Tether could face a serious existential threat.
And if Tether were to disappear, a bitcoin and cryptocurrency market crash would be very likely, at least if we’re to believe the crypto skeptics.
Chance of Success?
Of course, this whole discussion may be moot, since the STABLE Act hasn’t been passed. There’s also a very good chance that it may never be passed, given the opposition to the bill already voiced by a number of Republican congressmen.
To succeed, the bill really needs a Democrat-majority Senate. There’s a possibility of this happening, with a Senate runoff election in Georgia set to be very close when it takes place on January 5. If the Democrat candidates win both seats, there will be a 50-50 split in the Senate, with Vice President Kamala Harris having the deciding ballot in votes.
This would give the STABLE Act some chance of being passed, but it would need pretty much unanimous support from the Democratic Party, given how finely balanced the Senate would be in the event of a Democrat victory on January 5. There’s no guarantee that every Democrat senator will support the legislation, while there’s also certainly no guarantee that the Democrat candidates will win both seats in January.
In other words, it’s arguably a safe bet that the STABLE Act won’t become law. And to play Devil’s Advocate, even if it does, it may not be the death knell that some suggest it would be. Yes, many (or most) stablecoin issuers probably won’t be able to meet its requirements, but those that do end up meeting them will gain further legitimacy in the eyes of retail and institutional investors alike. And in the long run, this will only give Bitcoin and cryptocurrency a firmer, more sustainable boost.