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Crypto Stablecoins Face Increasing Regulatory Scrutiny

The new rules would also impose anti-money-laundering and know-your-customer requirements on stablecoin issuers like Tether.

Crypto Stablecoins Face Increasing Regulatory Scrutiny
The Tether logo is seen on a smartphone in this arranged photograph taken in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Tether and other so-called cryptocurrency stablecoins have long flown under the radar of international regulators. That’s about to change.

The Financial Action Task Force, with members from about 200 countries who recommend ways to stop money laundering and the financing of terrorism, said in a report Tuesday that stablecoins need to comply with standards to guard against both practices.

That means that exchanges and other entities supporting them will likely have to verify their users’ identities and comply with other policies on virtual assets such as Bitcoin that FATF set forth last year. The FATF report was prepared for G-20 finance ministers and central bank governors after the completion of a 12-month review.

Crypto Stablecoins Face Increasing Regulatory Scrutiny

“My assumption would be that FATF will update guidance in relations to stablecoins in the near future,” said Jesse Spiro, global head of policy and regulatory affairs for compliance technology provider Chainalysis.

The new rules would also impose anti-money-laundering and know-your-customer requirements on stablecoin issuers like Tether as well as new endeavors such as Libra, an association started by Facebook Inc. to develop global stablecoins. Stablecoin providers, as well as exchanges that support the coins, would have to set up processes for monitoring transactions, investigations and regulatory filings. They’d also have to make sure that over-the-counter trading desks, which often buy stablecoins for clients, are compliant, Spiro said.

“OTC desks, there’s been a lot of illicit activity that we’ve been able to follow through,” said Spiro. “It’s something that regulators are going to be taking a long hard look at.” Tether uses Chainalysis for a part of its compliance process, Spiro said.

The extreme volatility in cryptocurrencies led to the development of stablecoins such as Tether, which has been trading since 2015. To avoid the big price swings seen in tokens such as Bitcoin, stablecoins are often pegged to another asset such as the U.S. dollar.

In its report, FATF said that “stablecoins appear better placed to achieve mass-adoption than many virtual assets.” Libra, for example, wants stablecoins to be used by the world’s 1.7 billion under-banked. And many crypto traders as well as export-import businesses in Asia are using Tether.

Many exchanges, such as Gemini Trust Co. in the U.S., don’t support Tether, the world’s most popular stablecoin. Last year, New York Attorney General Letitia James went after Tether-related companies, claiming they hid a loss of about $800 million of comingled client and corporate funds. The companies argued the case in front of an appeals court in Manhattan in early March and are awaiting a ruling expected within months.

Tether didn’t immediately return a request for comment.

“For the exchanges that are already serious about compliance, this is not going to be a huge change,” Noah Perlman, chief compliance officer at Gemini, said.

©2020 Bloomberg L.P.