Can Tether's Dominance Survive the Test of US Stablecoin Bill?

Author: Jesse Hamilton, Source: Coindesk, Compiler: Shaw Golden Finance

The USDT issued by Tether is the largest stablecoin in the global market. Data shows that the current issuance of USDT pegged to the US dollar has reached 155 billion US dollars. But as it stands, Tether is almost certainly unable to meet the compliance requirements of US lawmakers. The US Senate passed the landmark GENIUS Act on Tuesday, which promoted the US federal government's regulatory efforts on stablecoins. The bill will then be submitted to the House of Representatives for deliberation and will be signed into law by the President after the Senate and the House of Representatives reach an agreement.

According to expert predictions, Tether may eventually face a choice: either overcome numerous difficulties to comply with future laws; or settle for the second best and try to maintain market share outside the United States. The clarification of the US government's regulatory framework may drive the expansion of the industry, but at the same time affect the regulatory orientation of other jurisdictions.

The current draft bill opens the way for foreign stablecoin issuers to enter the U.S. market, but the process may be complicated. In general, if a company like Tether wants to issue tokens to U.S. users, it must first be regulated by a recognized foreign agency that is comparable to U.S. standards. In addition, the issuer may also need to register and be regulated by the U.S. Office of the Comptroller of the Currency (OCC) and "hold sufficient reserves at U.S. financial institutions to meet the liquidity needs of U.S. customers in the event of the issuer's bankruptcy."

All issuers subject to potential legal regulation must comply with strict reserve standards and hold cash, U.S. Treasury bonds and other relevant highly liquid assets that are anchored to their issuance volume on a one-to-one basis. These institutions are also required to be audited monthly by a registered accounting firm, and the audit results must be certified by the company's CEO and CFO, which means that executives will be personally legally responsible for the authenticity of information disclosure. It is worth noting that the regulatory framework sets more frequent information disclosure obligations for stablecoin issuers than traditional financial institutions.

In addition, relevant institutions must also fully comply with anti-money laundering regulations applicable to U.S. financial institutions.

Does Tether need to change in a hurry?

"If I were Tether, I would not rush into the United States unless I understood the relevant regulations," said Steve Gannon, a digital asset client lawyer at Davis Wright Tremaine, in an interview. "The impact on Tether in terms of complying with these regulations may be a huge investment of time, energy, manpower, money and technology."

Ultimately, as one of the most profitable companies in the world, Tether may continue to focus on emerging markets, and the impact of the GENIUS Act on these markets is relatively small. Tether recently moved its headquarters to El Salvador, which has a loose cryptocurrency regulatory environment and is obviously not very well-developed in financial regulation.

Nevertheless, the U.S. bill gives the Treasury secretary wide discretion to assess which countries have sufficiently robust regulations and whether certain companies can be granted regulatory exemptions.

“For example, the Trump administration could reach a reciprocal agreement with El Salvador, where Tether is based, to allow Tether access to U.S. markets while sidestepping the bill’s requirements,” said Senator Elizabeth Warren, a senior Democrat on the Senate Banking Committee and one of the bill’s main opponents.

Corey Frayer, director of investor protection at the Consumer Federation of America and former cryptocurrency policy adviser at the U.S. Securities and Exchange Commission, said: "It is hard to imagine that El Salvador can establish a regulatory system as sound and safe as the United States. However, under the regulations of existing regulators, they are still eligible for reciprocal treatment and enjoy the same standards as the United States."

Despite the tough words of Warren and her allies, they have not been able to stop many Democratic lawmakers from supporting the bill, which supporters believe will at least begin to supervise and control the key part of the crypto industry, stablecoins. Critics of the bill believe that the bill still has obvious loopholes that could allow unregulated foreign stablecoins to circulate through U.S. decentralized crypto platforms.

Warren said in a speech on the Senate floor last week: "Unfortunately, the GENIUS Act dramatically expands the market for stablecoins while failing to address the fundamental national security risks they pose. The bill also contains glaring loopholes that allow Tether to enter the U.S. market."

Tether U.S. Plan

However, Tether CEO Paolo Ardoino has said in recent weeks that the company may not introduce its tokens to the U.S. market as a direct issuer, but is considering issuing a U.S.-based branch-settled stablecoin that could be fully regulated in the United States.

For Tether, U.S. regulations are a double whammy, and it is currently far from meeting those standards. Tether warned its users in its updated terms of service this year: "If Tether fails to comply with the evolving regulatory regime, Tether and its affiliates may be subject to regulatory action, which could have an adverse impact on Tether and its ability to operate." While the Senate's vote to pass the GENIUS Act is an unprecedented policy victory for the digital asset industry, there is still a lot of uncertainty because the House of Representatives may have its own version and more important supporting legislation - a regulatory framework for other cryptocurrency sectors - is still under development. Before the bill is approved by Trump and federal agencies issue implementation details, it will be difficult for stablecoin issuers to obtain clear compliance guidance.

Richard Rosenthal, head of digital asset regulation at Deloitte, said: "Foreign issuers face two major unknowns in their path ahead: (1) the conditions under which foreign issuers will ultimately be allowed to serve U.S. customers; and (2) how the relevant regulatory discretion will be exercised to allow or restrict their access to the U.S. market. It remains to be seen how this politically contentious area will play out."

However, Freire said it is unlikely that House lawmakers will lower the compliance bar for Tether - especially in the face of the company's ally in the Trump administration, Commerce Secretary Howard Lutnick, who previously worked at brokerage firm Cantor Fitzgerald and was responsible for managing Tether's U.S. reserves.

“I don’t think the House will force anything further against Tether,” Freire said. But he added that if large non-bank competitors such as Google and Amazon begin to launch stablecoins, “the House may be motivated to take more action on this issue.”

Competing Circle?

U.S. stablecoin issuer Circle and its USDC have been looking to grab market share from rival Tether, and Circle is also looking to participate in what some expect to be a post-regulatory wave of U.S. cryptocurrencies. If institutional investors and traditional financial companies embrace digital assets as the industry hopes, and Tether continues to stay outside the U.S. financial system, it may miss out.

Earlier this year, the U.S. Securities and Exchange Commission (SEC) added some stablecoins to its growing list of cryptocurrency projects that the agency deemed not to be on its radar. However, the SEC’s statement came with some warnings for Tether.

Although the SEC, which has been run by crypto-friendly leaders since Trump’s election, has also excluded stablecoins from its securities jurisdiction, the SEC also noted that appropriate stablecoin reserves “do not include precious metals or other crypto assets,” both of which are part of Tether’s reserves. The GENIUS Act explicitly states that “payment stablecoins are not securities or commodities, and approved payment stablecoin issuers are not investment companies, but this is not yet a statutory requirement.”

Technically, these considerations are not in Tether’s current business model, as Tether deliberately avoids direct contact with US customers, at least for now.