Details are emerging that the focus of last week’s meeting of the President’s working group on Financial Markets primarily discussed the “rapid growth of stablecoins”, and in particular, that of Tether and the Facebook backed Diem stablecoin.
Tether faces alleged bank fraud allegations and claims of insufficient backing
Tether has come in for more flak than usual over recent times. The oft levelled accusation that the dollar pegged stablecoin does not have sufficient backing is once more rearing its ugly head.
In February, both Tether and Bitfinex paid $18.5 million in order to settle the allegation that they had hidden the loss of hundreds of millions of dollars of client and corporate funds. The settlement was also for the allegation that they had lied about their reserves.
It was discovered that at one point, Tether only had around 74% of backing, which consisted of cash and short-term securities.
Even as recently as March, Tether itself admitted to having around half of its $60 billion reserves in commercial paper, making it the 7th biggest holder of commercial paper in the world according to a JP Morgan Strategist.
To add to this, the US Justice Department is currently looking into a case of alleged fraud by Tether, whereby at some time in the past illegal bank dealings were made, which involved hiding the fact that certain transactions were linked to cryptocurrency.
Diem bows to regulators
Diem is an association of backers that includes Facebook and 26 other large institutions. On the Diem website the vision is “to enable the open, instant, and low-cost movement of money”.
However, ever since Facebook put forward its proposal to roll out the Libra stablecoin, US and European law makers have been firmly negative in their reactions to such a move.
Since then, the Diem association has come into being, and in order to pacify regulators it has scaled down its ambitions. It has now let it be known that it will register as a money services business and run a blockchain-based payment system.
In a further move to acquiesce to regulators the CEO of Diem, Christian Catalini, said:
“Diem has committed to fading out, for example, Diem dollar, if there were such a thing as a digital dollar issued by the Fed,”
The Treasury Secretary Janet Yellen said that there was a need to act quickly to put regulatory frameworks in place as regards stablecoins. Senator Elizabeth Warren may well have helped to prompt this statement after her letter to Yellen underlined her perceived threats to the financial system from stablecoins and cryptocurrencies.
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