Stablecoin Wars: Circle Calls for US Treasury to Investigate Tether Amid Illicit Finance Concerns

The stablecoin arena is heating up, and the tension between industry giants Circle and Tether is palpable. This week, a Circle executive publicly called for the US Treasury Department to scrutinize Tether, the issuer of the dominant stablecoin USDT. Why is Circle, the force behind USDC, pushing for action against its biggest rival? Let’s dive into the details of this escalating stablecoin saga.

Circle’s Executive Urges Treasury Action Against Tether: What’s the Fuss?

Caroline Hill, Senior Director of Global Policy and Regulatory Strategy at Circle, didn’t mince words when she testified before the House Subcommittee on Digital Assets, Financial Technology, and Inclusion on Thursday. Her message was clear: the US Treasury should seriously consider taking action against Tether.

This call to action came during a session where Representative Wiley Nickel questioned Hill about Tether and its connections to the US financial system. Nickel highlighted Cantor Fitzgerald, a US financial services firm reportedly managing a massive $72 billion portfolio of Treasury bonds for Tether. This connection, according to Nickel, gives Tether a significant “nexus to the US financial system.”

The core of the concern? Nickel directly questioned whether the Treasury already possesses the authority to act, given this US link and the allegations surrounding Tether’s role in illicit activities.

Key Takeaway:

• Circle, a major player in the stablecoin market, is openly advocating for US Treasury intervention against Tether.
• The argument centers on Tether’s US connections via Cantor Fitzgerald and concerns about illicit finance.

“US Touchpoint” and Terrorist Financing: Circle’s Argument

Hill’s response to Representative Nickel’s query was unambiguous. She believes the Treasury Department does indeed have the authority to act on Tether due to this “US touchpoint” through Cantor Fitzgerald.

Furthermore, Hill emphasized the gravity of the situation, stating, “And I hope that they’re looking at this seriously given Tether’s reputation, as well as the data that we’ve seen that they’re contributing to terrorist financing and other malign activity.”

This statement underscores the serious allegations against Tether, linking USDT to activities like terrorist financing. While these are serious accusations, it’s crucial to remember they are allegations and Tether refutes them.

Cantor Fitzgerald Defends Tether: “They Have the Money”

Adding another layer to this complex narrative, Cantor Fitzgerald’s CEO, Howard Lutnick, has publicly defended Tether. In a January interview with Bloomberg, Lutnick confirmed that his firm manages a significant portion of Tether’s assets. Crucially, Lutnick vouched for Tether’s financial standing, asserting, “they have the money they say they have.”

This endorsement from a US financial institution managing Tether’s assets could be seen as a counterpoint to the concerns raised by Circle and others. It suggests that at least one US firm has confidence in Tether’s reserves.

Points to Consider:

• Circle is highlighting Tether’s US connection as grounds for Treasury action.
• Concerns about Tether’s role in illicit finance, including terrorist financing, are central to Circle’s argument.
• Cantor Fitzgerald, managing Tether’s assets, defends Tether’s financial solvency.

“US Values” and Stablecoins: A Matter of Principle?

Beyond the immediate concerns about illicit finance, Hill’s testimony also touched upon a broader philosophical point: the values associated with US dollar-pegged stablecoins.

She argued, “I personally believe that no company should be allowed to reference the US dollar without having those democratic values inside the company, inside their US dollar-backed stablecoin.”

This statement suggests that Circle views the issuance of a USD-pegged stablecoin as carrying a responsibility to uphold certain “democratic values.” It raises questions about what these values entail and whether they should be a prerequisite for operating in the stablecoin space, particularly when referencing the US dollar.

Hill further suggested that if the Treasury needs additional authority to enforce these values, the House subcommittee should consider providing it. This indicates a potential push for stricter regulatory frameworks for stablecoin issuers, especially those linked to the US dollar.

UN Report: USDT as a Tool for Criminals?

The backdrop to this escalating stablecoin rivalry includes a recent report from the United Nations Office on Drugs and Crime (UNODC). The UNODC report claimed that criminals in East and Southeast Asia favor USDT, particularly on the Tron blockchain. Why USDT?

According to the UN report, USDT’s appeal to criminals stems from:

• Stability: As a stablecoin, USDT maintains its value, reducing volatility risks.
• Ease of Use: USDT is readily available and easily transferable.
• Anonymity: While blockchain transactions are traceable, certain blockchains and services can offer a degree of anonymity.
• Low Transaction Fees: Blockchains like Tron offer lower transaction fees compared to some traditional financial systems.

The UNODC report further detailed how criminals often funnel USDT through online gambling platforms, many of which operate illegally. This highlights a potential real-world use case of USDT in facilitating illicit activities.

Tether’s Response: Tracking Transactions and Law Enforcement Collaboration

Tether has strongly refuted the UNODC’s claims and defended the integrity of USDT. The company points to its proactive measures in combating illicit finance, including a recent instance in November where Tether froze $225 million worth of USDT. This freeze was triggered by a US Department of Justice (DOJ) investigation linking these wallets to “pig-butchering” romance scams.

Tether argues that USDT’s transparent nature, where every transaction is meticulously tracked on the blockchain, makes it “an impractical choice” for illicit financing. They emphasize their collaboration with law enforcement agencies worldwide to combat financial crime.

Tether’s Defense Highlights:

• USDT transactions are transparent and traceable on the blockchain.
• Tether actively collaborates with law enforcement to freeze illicit funds.
• Tether argues USDT is not an ideal tool for illicit finance due to its transparency.

The Stablecoin Wars Intensify: What’s Next?

Circle’s public call for Treasury action against Tether marks a significant escalation in the “stablecoin wars.” The rivalry between USDC and USDT is not just about market share; it’s increasingly intertwined with regulatory scrutiny, national security concerns, and fundamental questions about the future of digital currencies.

Key Questions Moving Forward:

• Will the US Treasury Department heed Circle’s call and launch a probe into Tether?
• How will regulators balance innovation in the stablecoin space with the need to combat illicit finance?
• Will the debate about “US values” and stablecoins shape future regulatory frameworks?
• How will Tether respond to the continued pressure and allegations?

The coming months are likely to be crucial for the stablecoin market. The regulatory landscape is evolving rapidly, and the actions taken by the US Treasury and other agencies could have profound implications for the future of USDT, USDC, and the broader cryptocurrency ecosystem. Stay tuned as this story unfolds.

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