Once signed into law, the GENIUS Act will give stablecoin issuers 18 to 36 months to comply with its stipulations. If they fail, they will be banned from operating within the US market. Tether, the issuer of the world’s largest stablecoin USDT, has a difficult decision to make.
Known for its lack of transparency and failure to publish regular audits, Tether can choose one of three options. It can either comply, withdraw from the US market, or launch a separate stablecoin that abides by the GENIUS Act’s thorough transparency requirements and curbs risky practices.
A New Era for Stablecoins
The GENIUS Act aims to bridge cryptocurrency and traditional finance in the United States by providing essential regulatory safeguards for stablecoins. These are the least volatile digital assets crypto offers and the most attractive for risk-averse individuals.
Though the bill’s passage marked a powerful victory for an industry once deemed a Ponzi scheme by most, not everyone is set to win under its guidelines.
Tether’s USDT, which dominates over 60% of the global stablecoin supply, might be among the losers, as the act introduces unprecedented demands for transparency and oversight.
The bill, already passed by the Senate and now moving to the House of Representatives for final shaping, will determine the precise compliance timeline for stablecoin issuers. The Senate’s version offers three years, while the House suggests 18 months.
Tether’s Troubled Transparency Record
Before the GENIUS Act was passed, Tether faced significant and long-standing criticism regarding its transparency and adherence to rigorous auditing standards, particularly concerning its reserves.
For years, the stablecoin issuer consistently declined to undergo a comprehensive and independent audit by a major accounting firm. Concerns regarding how Tether backed its reserves eventually led to significant legal action from the US justice system.
In 2021, Tether was compelled to settle an investigation with the New York Attorney General. The Attorney General had alleged that Tether and its affiliated exchange, Bitfinex, made false statements about backing up the USDT stablecoin.
A core element of the investigation centered on Bitfinex losing access to approximately $850 million in customer and corporate funds held by a third-party payment processor. Bitfinex allegedly borrowed substantially from Tether’s reserves to address this deficit and facilitate customer withdrawals.
Consequently, Tether’s USDT was, for a period, not fully backed by fiat currency as publicly claimed. The settlement required both entities to pay a civil penalty of $18.5 million and banned them from operating or serving customers in New York State.
Since then, Tether has begun releasing quarterly attestations about its reserves. However, these are still insufficient under the provisions of the GENIUS Act.
Beyond audits, the issuer must strictly adhere to requirements curbing risky practices associated with stablecoin use.
Curbing Illicit Use
Historically, malicious actors have exploited stablecoins for sanctions evasion and global espionage.
As the world’s largest stablecoin issuer, Tether has faced scrutiny after evidence surfaced that adversaries like Russia and North Korea were using USDT to circumvent American sanctions.
In recent years, Tether has increasingly asserted its commitment to combating illicit activity and has publicly claimed to cooperate with law enforcement.
According to the issuer, Tether has a strict wallet-freezing policy and has used it to comply with numerous law enforcement requests to freeze stablecoins linked to illicit activities.
In March, Tether assisted the US Secret Service by freezing $23 million linked to a sanctioned exchange and has cooperated with the Department of Justice and the Federal Bureau of Investigation on other cases.
While these developments are positive for Tether, the issuer must strictly adhere to new legal requirements. The GENIUS Act explicitly mandates that all stablecoin issuers, including foreign entities, possess the technological capability to freeze and seize stablecoins and comply with lawful orders from authorities.
Furthermore, they must regularly implement Anti-Money Laundering (AML) programs and conduct Know Your Customer (KYC) procedures.
Tether must decide whether to comply with these new measures or if a complete withdrawal from the US market is a more favorable strategy. It has many factors to consider.
Can USDT Thrive Without the US Market?
Tether dominates the stablecoin market by an enormous margin. According to CoinGecko, the issuer currently has a total supply of nearly 158 billion. Circle’s USDC comes in second, trailing far behind with a supply of 62 billion.
While the United States is an important stablecoin market, it is not Tether’s primary focus. The issuer’s most significant business comes from its operations in Asia, Latin America, and other emerging markets.
In fact, most of the trading volume for Tether’s stablecoins, which surpassed $62 billion yesterday alone, occurs on platforms outside the United States, particularly Binance. In that sense, withdrawing from the US market may not be such a big blow to Tether.
BeInCrypto did not receive an immediate response when it contacted Tether for comment. However, the issuer’s possible courses of action can be deduced by observing how it acted in similar situations.
When the European Union implemented the Markets in Crypto-Assets (MiCA) regulation, Tether pulled out of the market. MiCA started requiring strict licensing and regulatory approval for stablecoin issuers, rigid reserve requirements, and enhanced auditing for maximum transparency.
While Tether’s core business thrives outside the US, the American market’s great significance means that pulling out could still be highly damaging for the issuer.
The High Stakes of a Withdrawal
The United States is a critical market for financial innovation and liquidity. Pulling out would mean losing direct access to a vast user base, institutional investors, and significant global trading volume.
A withdrawal would also send the wrong message to investors, users, and traditional financial players. Tether would damage its reputation by inherently admitting its inability or outright unwillingness to meet robust regulatory standards, eroding trust.
Meanwhile, Circle’s USDC stands to gain a significant advantage. As a fully compliant stablecoin actively working to meet US and EU regulations, Circle could potentially attract users and market share away from Tether.
However, Circle’s second-place position is significantly behind Tether’s, indicating that compliance alone won’t be enough to overtake the market leader.
In fact, Tether’s substantial market dominance might compel American lawmakers to offer concessions that incentivize the company to continue its operations in the US.
Is There Still Room for Compromise?
While the Senate has already passed the GENIUS Act, the legislation still faces potential changes as it moves to the House of Representatives. Lawmakers from both chambers must now reconcile the provisions of the GENIUS Act with the House’s version, known as the STABLE Act.
This reconciliation process offers opportunities for revisions, including the crucial compliance timeline for stablecoin issuers.
Beyond this duration, other notable differences between the two bills, such as restrictions on public entities issuing stablecoins and specific requirements for foreign issuers, will also be subject to negotiation and potential concessions.
An anonymous source close to the GENIUS Act’s legislative process suggested that US lawmakers and Tether will likely seek a middle ground.
This inclination may stem from the understanding that stablecoins, because they need to hold large reserves in dollar-backed assets like Treasury bills, could boost demand for US debt and indirectly support the dollar’s value, especially with current concerns about its stability.
The anticipated boom in stablecoin demand after the passage of the GENIUS Act makes this aspect critical.
“There’s kind of been a mutual recognition from the US government as well as from Tether that they’re a bit stuck with each other… The demand [Tether has] for treasuries is larger than Germany. It’s such a significant volume that it would not be in the US’s best interest to force them to divest all that by some overly stringent regulation. They need to meet somewhere that’s workable and profitable on both sides of that relationship,” the source told BeInCrypto.
However, there’s a third option that Tether has already publicly said it was considering.
Will Tether Launch a Separate Stablecoin for the US?
Tether’s CEO, Paolo Ardoino, announced earlier this year that the company plans to introduce a new, US-based stablecoin as soon as this year. This offering would feature distinct characteristics from USDT and be specifically tailored to domestic needs.
He added that while USDT mainly works to serve underbanked populations worldwide, a separate stablecoin that complies with the GENIUS Act would work more effectively in the US market.
Yet, this might not be a choice that falls under Tether’s best interest.
“Functionally, they probably would prefer not to have to do that. It just creates more overhead and introduces inefficiencies administratively and compliance-wise. It’s not the ideal situation for them to have to kind of firewall US users versus track what’s going in and out of the geolocations,” the same source said on the topic.
In the end, Tether’s path forward is fraught with critical choices. With the GENIUS Act setting a new benchmark for transparency and risk management, the world’s largest stablecoin issuer must now weigh the benefits of US market access against the costs of compliance, potentially ushering in a new era for its operations or ceding ground to more compliant rivals.
