Tether and Facebook-backed stablecoin Diem raise concerns among U.S. regulators

On July 28, Bloomberg quoted people familiar with the matter as saying that U.S. regulators recently held a meeting to discuss the financial risks posed by stablecoins, with the main focus of the meeting being Tether and the Facebook-backed Diem token.

The president’s Working Group on Financial Markets was particularly concerned about claims that Tether holds large amounts of commercial paper, bonds issued by companies to meet short-term funding needs, according to people familiar with the matter. Participants likened the situation to an unregulated money-market mutual fund that could be vulnerable to a chaotic exodus by investors, said one of the people, who asked not to be identified discussing private matters.

Regulators have also expressed concerns about Diem, a cryptocurrency developed by an association that includes Facebook, the social media company with nearly 3 billion monthly active users, and other companies and nonprofits, because of its potential for widespread adoption.

Yellen urged agency heads at the July 19 meeting to “act swiftly” to ensure stablecoins face appropriate rules, according to a brief statement from the Treasury Department. The market value of these crypto tokens now exceeds $100 billion, with Tether accounting for more than half.

Stablecoins are known for being pegged to fiat currencies and largely immune to the volatility of bitcoin and other tokens. But regulators worry they are too large and often used to facilitate illegal financial transactions.

Michael Hsu, acting comptroller of the U.S. Bureau of the Currency, said regulators are reviewing Tether’s commercial paper reserves to see if it lives up to the company’s promise that each token is backed by the equivalent of one dollar. He added that stablecoins look “a lot like” money funds, which have been a priority for regulators since investors pulled out of funds en masse in March 2020, fueling market panic caused by the pandemic.

A Facebook spokesman did not respond to a request for comment. The association has previously said it is working closely with U.S. regulators.

“We are pioneers in this industry, which is brand new,” Tether said in a statement. “We not only have to keep up with the new rules, we have to help shape them.”

Commercial paper accounted for about half of Tether’s roughly $60 billion in reserves as of the end of March, according to the company. Such a holding would make Tether the world’s seventh-largest holder of commercial paper, JPMorgan Chase & Co. strategist Josh Younger wrote in a May report.

As cryptocurrencies have exploded, the U.S. government has been discussing how best to regulate this largely unregulated industry. Many predict that the issue will fall to the Financial Stability Oversight Council, a super organization of regulators also led by Yellen. It has the ability to designate companies and even products like stablecoins as systemically important, which will lead to increased regulation by the Federal Reserve. Another way is for the FSOC to instruct agencies such as the U.S. Securities and Exchange Commission to take action. (Blockbeat)