Week In Crypto: ‘Opaque’ Tether Flunks New Stablecoin Test From S&P Global

Tether performs poorly in a new stablecoin ranking system, a US senator builds support for a crypto money laundering bill, and the US Securities and Exchange Commission (SEC) looks to parlay Binance’s guilty pleas into its own lawsuit.

A new stablecoin stability assessment from S&P Global Ratings has ranked Tether among the weakest of US dollar stablecoins.

Launched this week, the new ratings system assesses stablecoins based on factors such as reserve asset quality, custody risks, liquidity, redeemability, third-party dependence and regulatory compliance.

S&P Global Ratings awarded Tether a score of 4 (“constrained”). The highest score available was 2 (“strong”) and the lowest was 5 (“weak”).

Of the eight stablecoins assessed, only three were given a “strong” rating overall, namely Circle’s USDC, Pax Dollar (USDP) and Gemini Dollar (GUSD). The rest were rated either “weak” or “constrained”.
 

Tether scores low on all but price stability

Although Tether has never undergone a full audit of its reserve accounts, for the purpose of the assessment S&P accepted Tether’s latest quarterly “attestation” as fact.

In September 2023, Tether had $83.2bn of USDT in circulation backed by $86.4bn in reserve assets.

With almost 80 percent of those assets in short-term US Treasury bills or overnight repos backed by US Treasuries, S&P said that “most” of Tether’s reserve assets are “low-risk”.

However, S&P also noted that little is known about how Tether procures or holds its US Treasury bills.

For example, S&P mentioned a “reference in the public domain” to one US financial institution that serves as a “custodian” of Tether’s Treasury bills.

This is likely to be Cantor Fitzgerald, a firm that specialises in institutional equity and fixed-income sales, and whose CEO has said publicly that his firm is a holder of Tether’s T-bills.

However, since Tether does not publish the unique CUSIP numbers of the Treasuries it holds, investors have no way to independently verify that these holdings really exist.

In contrast, since August 2022, Circle has published the CUSIP numbers of its US Treasuries in all of its monthly attestations.

As for the remaining 20 percent of Tether’s reserves, S&P noted that these are made up of money market funds and “high-risk” assets, such as Bitcoin and precious metals.

Lack of oversight

Tether also scored low on governance and regulatory compliance, with S&P describing the former as “opaque” and the latter as almost non-existent.

“Unlike some other issuers of stablecoins, Tether is not subject to regulation or supervision of an authoritative body,” the report notes.

This contrasts with Circle and Paxos, for example, which are both subject to regulatory oversight by the New York State Department of Financial Services (NYDFS).

Finally, S&P highlighted “limitations” to the “primary redeemability” of USDT. Only Tether’s own customers can redeem directly from Tether, and each direct redemption is subject to a minimum threshold of $100,000 and a fee of 0.1 percent or $1,000, whichever is higher.

Those that cannot redeem directly from Tether must redeem on a secondary market, typically a crypto exchange, which comes with its own liquidity and solvency risks.

Senator Warren builds support for anti-crypto bill

US senator Elizabeth Warren (D-MA) has announced an expanded coalition of Senate support for her bipartisan Digital Asset Anti-Money Laundering Act. 

Five additional Democrat senators have joined as co-sponsors of the bill, including three members of the Senate Banking Committee (of which Warren is also a member).

The five senators join a group of 15 existing co-sponsors, including the chairs of the Senate Homeland Security Committee and the Senate Judiciary Committee.

The bill aims to close loopholes that have made crypto-assets a vehicle of choice for money launderers, drug traffickers, terrorist organisations and hostile state actors.

Among its most controversial provisions, it would extend certain rules of the Bank Secrecy Act (BSA) to capture more of the digital asset ecosystem.

For example, the BSA’s know-your-customer (KYC) requirements would be extended to digital asset miners, validators and wallet providers.

Banks and money service businesses would also need to verify customer and counterparty identities in relation to certain transactions involving unhosted wallets.

The bill has been heavily criticised by figures in the crypto industry, who have said its provisions are overreaching and would push the industry out of the US.

Neeraj Agrawal, director of communications at Coin Center, a crypto policy think tank, said the bill is a “direct attack” on technological progress and personal privacy.

“While proposed as a solution to potential money laundering and terrorist financing, the bill is, in fact, a repudiation of liberal values and a move towards the types of surveillance and control prized by authoritarians,” he said.

“Unfortunately, the bill cannot be improved; it can only be opposed in its entirety.”

DOJ settlement tees up SEC in case against Binance

The SEC has filed a supplemental pleading against Binance, in an effort to counter a motion to dismiss and strengthen its case against the crypto giant.

The SEC’s filing draws heavily on details that have emerged — and to which Binance has admitted — in its $4.3bn criminal settlement with the Department of Justice (DOJ).

For example, Binance and former CEO Changpeng Zhao, both named as defendants by the SEC, have claimed that the SEC is pursuing them based on non-actionable extraterritorial conduct.

In its latest filing, the SEC points out that Binance has admitted to the DOJ that Binance.com “intentionally sought and served millions of customers located in the US” (prior to the launch of a dedicated Binance US platform in 2019).

Moreover, it “intentionally maintained substantial connections to the US, from which it generated, among other things, web traffic, user base, transaction volume and profit.”

Binance further admitted that it deliberately conspired to not comply with US law because it “determined that doing so would limit its ability to attract and maintain US users.”

In relation to the SEC’s personal charges, Zhao has argued that he did not have sufficient contact with Binance’s US-facing operations.

To this, the SEC counters that Zhao exercised “day-to-day” control over Binance in the US.

Not only that, but he also “authorised and directed” strategies to secretly encourage US customers to trade on Binance.com, after informing regulators that US customers would be blocked from Binance's global platform.