(Bloomberg) — Tether and the Facebook Inc.-backed Diem token were a main focus of a recent meeting U.S. regulators held on the financial risks posed by stablecoins, a fast-growing corner of the cryptocurrency industry, said people familiar with the matter.
The President’s Working Group on Financial Markets, a team of watchdogs led by Treasury Secretary Janet Yellen, was particularly concerned about Tether’s claims that it holds massive amounts of commercial paper — debt that companies issue to meet their short-term funding needs, the people said. Participants likened the situation to an unregulated money-market mutual fund that could be susceptible to a chaotic investor exodus, said the people who asked not to be named because the meeting was private.
Regulators also expressed worries about Diem — a coin being developed by an association that includes Facebook, as well as other companies and nonprofits — because of its potential for widespread adoption. The social media company has almost 3 billion active monthly users.
Yellen urged agency heads at the July 19 meeting to “act quickly” to ensure stablecoins face appropriate rules, according to a brief Treasury Department statement. The market value of the tokens now exceeds $100 billion, with Tether accounting for more than half that total.
Stablecoins are notable for being pegged to fiat currencies and largely immune to the volatility that plagues Bitcoin and other tokens. But regulators worry they’ve gotten too big and are often used to facilitate illegal financial transactions.
Read More: Why Yellen, Powell Cast a Wary Eye on Stablecoins
Acting Comptroller of the Currency Michael Hsu said regulators are scrutinizing Tether’s stockpile of commercial paper to see whether it fulfills the company’s pledge that each token is backed by the equivalent of one U.S. dollar. He added that stablecoins look “a lot” like money funds, which have been a priority for watchdogs since investors pulled money out of them en masse in March 2020, exacerbating the pandemic-fueled market panic. Other agencies that attended the meeting either declined to comment or didn’t respond.
A Facebook spokesman didn’t respond to a request for comment, while the Diem association declined to comment. The association has previously said it’s working closely with U.S. regulators, and that Diem is being built with consumer and anti-crime protections.
“We are pioneers in this industry, which is all very new,” Tether said in a statement. “We are not just keeping up with new rules, but helping shape them.”
At the end of March, commercial paper made up about half of Tether’s roughly $60 billion in reserves, according to a company presentation. Such a stake would make Tether the world’s seventh-biggest holder of commercial paper, JPMorgan Chase & Co. strategist Josh Younger wrote in a May report.
Read More: The Case for Stablecoins Being the New Shadow Banks
Tether has also been the target of federal prosecutors and state authorities. The U.S. Justice Department is investigating whether executives committed bank fraud in the company’s early days by concealing from lenders that transactions were linked to crypto, people familiar with the matter have said.
As cryptocurrencies have exploded, the U.S. government has been debating how best to oversee the mostly unregulated industry. Many predict the issue will land at the Financial Stability Oversight Council, an uber group of regulators also headed by Yellen. It has the ability to designate firms or even products like stablecoins as systemically important, which would lead to stepped-up supervision by the Federal Reserve. Another path would be for FSOC to direct agencies such as the Securities and Exchange Commission to take action.
SEC Chair Gary Gensler issued his own warning last week, arguing that “a stable value token backed by securities” may be violating U.S. rules if it’s not registered with his agency. On Monday, Massachusetts Democratic Senator Elizabeth Warren sent a letter to Yellen urging FSOC to boost oversight of cryptocurrencies.
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