Last month, CoinGeek reported how two stablecoin bills were competing to determine how U.S. stablecoin laws would play out. As of March 13, the GENIUS Act has momentum after the U.S. Senate Banking Committee passed it, meaning it will now be debated fully by the Senate.
The GENIUS Act favors a more innovation-friendly, state-level approach to regulation than the alternative STABLE Act. However, before passing it, the Banking Committee included several key changes.
What’s different about the GENIUS Act now?
There are now several significant changes to the GENIUS Act. Here’s a quick summary:
(1) Definition changes – The definition of a payment stablecoin changed significantly, excluding stablecoins that bear interest or yield and tokenized deposits. Stablecoins that are not governed by the Act cannot be used for interbank settlement.
(2) Capital requirements – These will be specific to the business model and risk profile of issuers. Bank subsidiaries won’t need to hold extra capital other than that outlined in the GENIUS Act.
(3) Reserve requirements – Significant changes include expanding cash to contain “money standing to the credit of an account with a Federal Reserve Bank” and overnight repo. Significant tightening of what can be considered a money market fund was also implemented.
(4) Anti-money laundering – Issuers will be treated as financial institutions under the Bank Secrecy Act with additional AML/sanctions protections. Rules will be tailored to the size and complexity of each issuer. Issuers must have the means to block payments to foreign nationals if required by the Treasury or by court order. Non-compliant foreign stablecoin issuers will be added to the Federal Register, and digital asset service providers will not be allowed to provide them with secondary trading.
(5) Governance – Stablecoin issuers with balances of greater than $50 billion must get an audit. Issuers won’t have FDIC Insurance or an equivalent. Persons convicted of insider trading, embezzlement, cybercrime, money laundering, financial fraud, or the financing of terrorism cannot issue stablecoins.
There are more detailed rules related to the above categories, as well as others like reciprocity, bankruptcy, and federal-state boundaries. However, these are the main ones of concern for our purposes.
What does this mean for Tether?
For years, we’ve been reporting on the sordid history of Tether. While its fate remains to be seen, the GENIUS Act, should it become law, spells out even more trouble for the already beleaguered stablecoin issuer.
The main concern for Tether is how stablecoin issuers will be classed as financial institutions under the Bank Secrecy Act. This would require Tether to implement rigorous AML/KYC checks to prevent money laundering, terrorist financing, and other illicit activities. USDT has a history of being associated with all three, including in Operation Destabilize and for sanctions violations. If classed as a financial institution under the BSA, Tether must maintain transaction records, report suspicious activity, and verify customer identities.
Furthermore, Tether has a history of fines and violations. It is banned from New York and paid the Commodity Futures Trading Commission (CFTC) $42.5 million in fines for misleading claims about its reserves. There are also allegations of bank fraud against some Tether executives.
Tether has also never submitted to a full audit. Since the BSA requires accurate and transparent reporting of financial records, it would struggle to provide these unless it does so, leading to further fines or even criminal investigations. Worse still, past violations could be reexamined under stricter laws.
In short, a history of refusing to prove its reserves, being associated with illicit transactions, and a checkered past would make it difficult for regulators to trust the world’s largest stablecoin issuer by market cap. All of a sudden, those past infractions that ended with financial penalties could become serious crimes with jail time for executives.
What would this mean for digital currency prices?
Tether has already been edged out of the European Union. Should it either be forced to leave U.S. markets or perhaps shut down entirely, there could be catastrophic consequences for the prices of digital currencies like BTC and Ethereum.
Why so? It’s no coincidence that the price of BTC began to run up shortly after Tether’s inception. In just the past 24 hours, Tether was responsible for close to $40 billion in trading volume and has a market cap of $145 billion; imagine how catastrophic it would be if the firm was found not to have the reserves it claims it does and experienced a deeper dive similar to what happened to UST several years back.
Even if things aren’t that bad, Tether being blocked from both the EU and the U.S. would mean it has a bleak future. While many other countries like Japan and South Korea will wait after the EU rules kick in, they will quickly follow what the U.S. decides to do. If two of the world’s largest economies ban Tether, so will those who want to do business in those economies.
With digital currency prices already suppressed in the wake of trade wars, tariffs, and global uncertainty, there’s potentially something even worse on the horizon: the collapse of the stablecoin underpinning the prices of most coins in the industry. It’s difficult to see how Tether could survive the GENIUS Act without radically changing its business model, and so far, it has shown extreme reluctance to do so.
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Gavin Lucas