Crypto Quill

Tether, the largest and most popular stablecoin in the crypto market, is facing some challenges from U.S. regulators who could influence its offshore usage and compliance. According to a recent report by JPMorgan, the Office of Foreign Assets Control (OFAC), a unit of the U.S. Treasury Department, has the power to impose sanctions on Tether and other stablecoins that operate outside the U.S. jurisdiction. This could have implications for the crypto industry, especially the decentralized finance (DeFi) sector, where Tether plays a vital role as a source of liquidity and collateral.

Tether’s Transparency and Compliance Issues

Tether, which claims to be backed by U.S. dollars and other assets, has been under scrutiny for its lack of transparency and auditability. The stablecoin issuer has faced several lawsuits and investigations from regulators and authorities who questioned its reserve holdings and business practices. In 2022, Tether reached a settlement with the New York Attorney General’s office, agreeing to pay $18.5 million and submit periodic reports on its reserves.

However, JPMorgan analysts said that the current disclosures by Tether were insufficient to address the concerns and risks associated with the stablecoin. They also said that the forthcoming regulations on stablecoins in the U.S. and Europe would likely reduce the attractiveness of Tether compared to other stablecoins that demonstrate greater transparency and compliance with the new standards. These regulations are expected to be coordinated globally by the Financial Stability Board (FSB), a body that monitors the global financial system and makes recommendations to the G20 countries.

Tether’s Vulnerability to U.S. Sanctions

Despite being a non-U.S. entity, Tether is vulnerable to the influence of U.S. regulators, especially the OFAC, which administers and enforces economic and trade sanctions against foreign countries, entities, and individuals. The OFAC can block or freeze the assets of those who violate its sanctions or pose a threat to the national security or foreign policy of the U.S.

JPMorgan analysts cited the example of Tether’s association with Tornado Cash, a privacy-enhancing platform on the Ethereum network, as a case of OFAC’s influence. Tornado Cash was sanctioned by the OFAC in 2022 for allegedly facilitating money laundering activities. Tether initially resisted but eventually complied with the OFAC’s directives and froze its stablecoins held in crypto wallets linked to Tornado Cash. According to Paolo Ardoino, the CEO of Tether, this was a retaliatory move by the OFAC, which was unhappy with the growing adoption of crypto and DeFi.

The analysts said that while legal actions against offshore entities and decentralized platforms are complex, indirect measures and international cooperation could potentially hamper the usage of Tether and other unregulated stablecoins. They also said that the OFAC could use its authority to blacklist or sanction any entity that transacts with Tether, such as exchanges, custodians, or DeFi protocols.

Tether’s Impact on the Crypto Industry

Tether, which has a market capitalization of over $70 billion, is the most widely used stablecoin in the crypto industry. It is also the most traded crypto asset, accounting for over 60% of the daily trading volume on major exchanges. Tether provides stability, liquidity, and interoperability for the crypto market, enabling traders, investors, and users to move funds across different platforms and jurisdictions.

Tether is also a key component of the DeFi ecosystem, which allows users to access various financial services such as lending, borrowing, trading, and investing without intermediaries. Tether serves as a primary form of collateral and liquidity for many DeFi protocols, such as Maker, Compound, Aave, Uniswap, and Curve. According to DeFi Pulse, a website that tracks the value locked in DeFi, Tether accounts for over 15% of the total value locked, which is currently over $100 billion.

Any disruption or regulation of Tether could have significant consequences for the crypto industry, especially the DeFi sector, which relies heavily on the stablecoin. Some of the possible scenarios include:

• A loss of confidence or trust in Tether, leading to a run on the stablecoin and a collapse of its peg to the U.S. dollar.
• A regulatory crackdown or sanction on Tether, forcing it to cease operations or limit its services in certain jurisdictions or platforms.
• A migration or transition to other stablecoins that are more transparent, compliant, and regulated, such as USDC, DAI, or GUSD.

These scenarios could affect the liquidity, volatility, and innovation of the crypto market, as well as the growth and development of the DeFi sector.