US puts stablecoin market on notice

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. Before we start:

Join me and fellow colleagues at the FT’s Crypto and Digital Assets Summit: Winter Edition on December 5 as we recap 2023 and look ahead to crypto’s regulatory endgame, the future of digital assets, tokenisation and much more. Hear from some of the leading players in the industry including Commissioner Kristin Johnson (CFTC), Ben McKenzie, Superintendent Adrienne A. Harris (NY DFS) and UK’s own MP Lisa Cameron and more. Register for your pass here: cryptowinter.live.ft.com

Scrolling through the list of crypto’s who’s who is more like a rundown of who was.

In just the last month the industry’s two biggest names — FTX’s Sam Bankman-Fried and Binance’s Changpeng Zhao — have been prosecuted by US authorities. Terraform Labs’ Do Kwon is facing extradition to either the US or South Korea.

The outlook for crypto exchanges, lenders or hedge funds has been irrevocably changed in 2023. But there is one crypto subsector that US law enforcement has so far bypassed: stablecoin providers.

These tokens are a linchpin of the crypto markets, a bit like chips at casinos: they allow traders to move in and out of bets easily.

They can argue they’ve had a pretty good year, even though trading volumes on markets have dried up, and not just because they’ve avoided lawsuits.

They say their customers’ deposits are backed against the dollar and the reserves are invested in liquid assets such as short-dated US government bonds, which now offer in excess of 4 per cent a year interest. To avoid accusations that these tokens are unregistered securities the interest accrued stays with the operator and isn’t passed on to the customer.

But maybe the US will turn to them next year. Speaking at the 2023 Blockchain Association’s Policy Summit in Washington this week, deputy secretary of the US Treasury Wally Adeyemo appeared to put them on notice.

“We cannot allow dollar-backed stablecoin providers outside the United States to have the privilege of using our currency without the responsibility of putting in place procedures to prevent terrorists from abusing their platform,” Adeyemo said. “We cannot permit offshore financial services providers to use jurisdiction-evasion tactics to avoid complying with our laws.”

Adeyemo did not mention any company by name but Tether is clearly the one that jumps out.

There are almost $90bn worth of Tether’s eponymous tokens flowing through the market. Circle has about $24bn of circulating value for its own USDC stablecoin and anyway, is based in the US. The next three collectively account for roughly $10bn. Virtually the rest of the market is British Virgin Islands-registered Tether.

Doubts over how the company manages those billions of dollars of assets have dogged it for years. Two years ago Tether paid a $41mn penalty to settle CFTC charges that it had falsely represented that its tokens were fully backed by dollars.

There have been no other charges since, although Tether’s role in crypto markets means it is never far from the biggest controversies.

For example, after Hamas’s October 7 attack on Israel Tether said that it froze more than 30 accounts that it said had been linked to “terrorism and warfare” in Israel and Ukraine.

“The core problem is that these crypto companies, which tend to operate out of reach, they’re being used by terrorists and other bad actors to evade sanctions and fund illicit activity,” said Jack Blum, lawyer and white-collar crime expert who previously spent 14 years with the Senate antitrust committee and the Senate foreign relations committee.

“They’re coming for the rest of the industry. It’s clear to me there’s no appetite for allowing this kind of activity to continue,” he added.

But others see another target for the US authorities. Companies that have a business because the greenback is stable and in demand are now in focus, John Christensen, an economist who specialises in offshore finance, told me.

“We’re seeing the playing out of an end game here, it’s a thinly veiled threat,” he said. Stablecoin providers that offer a dollar alternative are going to have to “work with regulators to make sure their business doesn’t enable money laundering or the financing of terrorists”.

What’s your take on Wally Adeyemo’s remarks? As always, email me your thoughts at scott.chipolina@ft.com.

Weekly highlights:

Binance may have a new chief executive but the regulatory warnings continue. This week the Philippine Securities and Exchange Commission issued an advisory against Binance, claiming it is not authorised to sell or offer securities to the local public. The regulator advised caution before investing in “these kinds of unregistered online investment platforms”.
Speaking of Binance, former chief executive Changpeng Zhao is still in the US. US district judge Richard Jones ruled on Monday that he could not return to Dubai, where the Canadian national lives, until the court makes a decision on whether he should remain on American soil until his sentencing in February.

Soundbite of the week: We’re going to siuuu

Cristiano Ronaldo, the iconic former Real Madrid and Manchester United footballer known for his ‘siuuu’ goal celebration, has been served with a lawsuit over his involvement in an alleged “offer and sale of unregistered securities in co-ordination with Binance”.

Filed in Florida this week, the plaintiffs are seeking more than $1bn in damages and have slammed Ronaldo for still listing the crypto exchange as a partner on his website.

“Binance’s partnership with celebrities like Ronaldo was clearly designed to use this positive reputation associated with specific celebrities to convince consumers that Binance was a safe place to buy and sell cryptocurrency.”

Data mining: CME overtakes Binance in futures

For the first time open interest for bitcoin futures at CME Group, the world’s largest (properly regulated) futures exchange, has surpassed the total on Binance (regulatory status in transition).

Last month it rose to $4.1bn on the CME compared with $3.7bn at Binance, making the Chicago exchange the largest market for bitcoin futures. Open interest is important as it measures the total amount of positions still open and is a marker of the depth of a particular futures market.

It suggests not only institutional interest in trading bitcoin futures — CME doesn’t really do retail traders like Binance does — but also hints at a potential power shift as stricken bellwethers — FTX, Bittrex, and now to some degree Binance — compete with the giants of the traditional world.