Stablecoin Issuers Need to Think Fast to Avoid the SEC’s Net

Stablecoin Issuers Need to Think Fast to Avoid the SEC’s Net

Tether is in some bother with the SEC. It has the President’s Working Group on Financial Markets, an organization composed of the SEC, the CFTC, The Fed and The US Treasury announcing late last year that stablecoins, which include Tether should be considered as securities. If Tether is indeed classified by the SEC as a security, then it could be sued by them for not registering its USDT as such.

Couple that with another threat from the Stable Act which recommends stablecoin issuers having to comply with a US banking charter, in order to “protect consumers from the risks posed by emerging digital payment instruments” and you have a potential catastrophe on the line for Tether and other major stablecoins. If Tether does get a fatal blow on the head from these two threats, then this could have an impact on the cryptocurrency market at large and certainly on the other stablecoins.

The Stable act seeks to make 4 major reforms, all with the goal of cracking down on stablecoins and other cryptos. These include:

Any issuer of a stablecoin must first obtain a banking charter;

Companies proffering stablecoin services to comply with necessary banking regulations under the current regulatory jurisdictions;

Any issuer of a stablecoin gets permission from the Fed, the FDIC, and the appropriate banking agency six months ahead of issuing and to conduct ongoing risk and impact analysis.

All stable coin issuers have FDIC insurance to keep reserves at the Fed to ensure that all stablecoins can be instantly exchanged for USD.

What Are Stablecoins?

This is a type of cryptocurrency that is more stable than a classic cryptocurrency as its value is tied to an outside asset like the USD or even gold which helps to keep the price less volatile and more stable.

What do these new threats mean for the other stablecoins?

Well, if these rulings and acts do come into play, then this is likely to equally affect all non-regulated stablecoins, giving more than a fighting chance for the financially regulated ones to outshine the likes of Tether.

One example is the USDC, which has been issued specifically by regulated financial institutions and backed by fully reserved assets, which makes it redeemable on a 1:1 basis to the US dollar. The USDC is governed by the Centre, which is a membership-based group that sets standards for stablecoins. As such, the USDC has quickly become the largest stablecoin ecosystem anywhere, with many companies and protocols using USDC as its standard stablecoin. A gleaming example of what can be accomplished in murky waters.

If this is the case, then we are likely to see more coins like the USDC coming into play. The other use case where stablecoins can still be used given the above potential restrictions is for a token like CHIP, which rather than being a tradable asset that could be classed as a security, is rather a transactional token for enterprise use cases. These include industries like online gaming, esports, and gambling – three areas that have seen an explosive influx of users during the coronavirus lockdowns. These operators then would not need to create their own tokens nor hold their own reserves against other stablecoins, the CHIP does it for them. The CHIP token is issued on ERC20 Ethereum and it is tracked by the BXTB token to generate actual yield for the holders. Perhaps with solutions like these, there is some wiggle room for new innovative stablecoins that slip under the regulators’ radar.

Bank of Thailand warns against illegal baht-backed stablecoin

Thailand’s central bank is warning the public against using a stablecoin that purports to be backed by the country’s sovereign currency. The regulator claims that the stablecoin exposes the users to such risks as money laundering and cybercrimes.

The Bank of Thailand (BoT) issued the warning against Thai Baht Digital (THT), Bangkok Post reports. BoT considers any activity involving the stablecoin illegal, Pruettipong Srimachand, the bank’s assistant governor of the legal group stated. He referred to the 1958 Currency Act which criminalizes the creation, issuance and usage of money.

Srimachand revealed that the new stablecoin is created on Terra, a platform supporting the issuance of stablecoins. He added:

“Although THT is not used as a medium of exchange, it could cause fragmentation of the Thai currency system should THT or other stablecoins come to replace, substitute or compete with baht issued by the central bank. Such usage would ultimately affect the general public’s confidence in the stability of the national currency system, which is the cornerstone of all economic activities.”

While deeming other stablecoins illegal, the BoT has been working on its own central bank digital currency under Project Inthanon. In its most recent move, the bank joined forces with China, Hong Kong and the UAE in CBDC research. BoT has been working on the research project with Hong Kong’s Monetary Authority for several months now, recently welcoming the other two countries to “further explore the capabilities of distributed ledger technology.”

Thailand isn’t the only country that has declared it illegal to issue stablecoins pegged to the local currency. As CoinGeek reported, China drafted a law in 2020 that legalized the digital yuan but banned its competitors. Under the law, China prohibits any entity from making or issuing a tokenized note or digital token that may replace the digital yuan’s market circulation.

“For anyone that violates such regulation, the PBoC will halt such activities and forfeit any proceed from the making and selling of yuan-backed digital tokens and issue a fine that is up to five times of the involved proceeds,” the draft law stated.

Most recently, India followed suit, proposing a draft bill that bans “private cryptocurrencies” and paves the way for a digital rupee.

In the U.S, a proposed bill in Congress is seeking to end the era of unregulated stablecoins. Aptly titled the STABLE Act, it requires stablecoin issuers to obtain a banking charter and abide by all banking regulations.

See also: CoinGeek Live panel, Digital Currency & Global Compliance: Tools & Tips for Exchanges, Wallets & Other Service Providers

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BoT warns against any use of THT stablecoin

BoT warns against any use of THT stablecoin

The Bank of Thailand is warning people to refrain from participating in any activities involving Thai Baht Digital (THT), as there are no legal assurances or protection with it and users could be at risk of cybertheft or money laundering.

Pruettipong Srimachand, the central bank’s assistant governor of the legal group, said any activities involving the new stablecoin THT that was created abroad on the Terra platform are considered illegal. The creation, issuance, usage or circulation of any material or token for money is a violation of Section 9 of the Currency Act 1958.

The central bank said recent developments have seen the private sector attempting to create cryptocurrencies using underlying assets or fiat currencies as an anchor to minimise price volatility. Such cryptocurrencies are known as stablecoins.

More recently, a new form of stablecoins using underlying algorithmic smart contracts was created to replicate the price and movement of various currencies. One unit of the stablecoin THT is denominated in and valued at one baht. Although THT is not used as a medium of exchange, it could cause fragmentation of the Thai currency system should THT or other stablecoins come to replace, substitute or compete with baht issued by the central bank, he said.

“Such usage would ultimately affect the general public’s confidence in the stability of the national currency system, which is the cornerstone of all economic activities,” said Mr Pruettipong.

In a separate development, the Bank of Thailand announced it plans to stop using Thai Baht Interest Rate Fixing (THBFIX), the existing reference rate which incorporates the London Interbank Offered Rate (LIBOR) for interest rate calculation, after June 30, 2023, in line with the upcoming plans to phase out the LIBOR.

The central bank is the THBFIX regulator and it uses the US dollar LIBOR format to calculate rates. The bank announced it will inform commercial banks of the terms of the THBFIX rate through existing channels until its usage comes to an end.

The Bank of Thailand plans to stop new TBHFIX-based financial calculations including loans, debentures and derivatives from July 1 of this year.