Bloomberg: Tether and Facebook-Backed Stablecoin Diem Trigger Concerns From US Regulators

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Recently, a U.S. regulatory agency held a meeting to discuss the financial risks associated with stablecoins.

According to BlockBeats news on July 28, Bloomberg reported, citing people familiar with the matter, that a recent meeting was held by U.S. regulators to discuss the financial risks posed by stablecoins, with a particular focus on Tether and Facebook-backed Diem token.

Sources said that the President's Working Group on Financial Markets was especially concerned about Tether's reported large holdings of commercial paper. Commercial paper is a bond issued by corporations to meet short-term financing needs. An anonymous source said meeting participants likened this situation to an unregulated money market mutual fund, which could be vulnerable to investor runs.

Regulators also expressed concerns about Diem due to its potential for wide adoption. Diem is a cryptocurrency developed by an association including Facebook and other companies and non-profits. Facebook, the social media company, has nearly 3 billion monthly active users.

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According to a brief statement from the U.S. Treasury Department, Yellen urged agency heads at a meeting on July 19 to "act quickly" to ensure that stablecoins are subject to appropriate regulation. The market value of these cryptocurrencies now exceeds $100 billion, with Tether accounting for over half.

Stablecoins are known for being pegged to fiat currencies and largely unaffected by the volatility of Bitcoin and other tokens. However, regulators are concerned that their scale is too large and they are often used to facilitate illicit financial transactions.

Michael Hsu, acting comptroller of the currency, said regulators are reviewing Tether's commercial paper reserves to see if they fulfill the company's commitment that each token is backed by the equivalent of one U.S. dollar. He added that stablecoins appear "very much" like money market funds, which have been a regulatory priority since investors collectively withdrew funds in March 2020, exacerbating pandemic-induced market panic.

A Facebook spokesperson did not respond to a request for comment. The association had previously stated that it is working closely with U.S. regulators.

Tether had previously stated in a release, "We are pioneers in this industry, it's a brand-new industry... We're not only keeping up with new regulations but also helping to shape them."

According to the company, as of the end of March, commercial paper accounted for approximately half of Tether's roughly $60 billion in reserves. JPMorgan Chase & Co. strategist Josh Younger wrote in a May report that such holdings would make Tether the world's seventh-largest holder of commercial paper.

With the explosive growth of cryptocurrency, the U.S. government has been debating how best to regulate this largely unregulated sector. Many predict the issue will fall to the Financial Stability Oversight Council, a super-body of regulators led by Yellen, including the ability to designate companies or even products like stablecoins as systemically important, triggering tougher oversight by the Fed. Another path would see the FSOC instruct agencies like the SEC to act.