When a powerful international financial oversight body releases a report on “so-called stablecoins,” you just know it isn’t going to be comfortable reading.
The Financial Action Task Force (FATF) did just that on July 7—and although the organization conceded that these assets have the potential to spur innovation and improve financial inclusion, it warned there could be significant downsides, too.
According to the FATF, stablecoins have only been adopted on a small scale so far, but new proposals (from the likes of Facebook) mean they could be adopted en masse.
“This propensity for mass adoption makes them more vulnerable to be used by criminals and terrorists to launder their proceeds of crime and finance their terrorist activities, thus significantly increasing their risk of criminal abuse for money laundering and terrorist financing purposes,” the report said.
Given that setting international standards to tackle money laundering and terrorist financing falls directly into the FATF’s wheelhouse, there’s little wonder it is concerned.
(Bear with us here, their report uses the phrase “so-called stablecoins” throughout. It’s weird, but it’s their language, not ours.)
“The FATF has found that so-called stablecoins share many of the same potential ML/TF risks as some virtual assets, in virtue of their potential for anonymity, global reach and layering of illicit funds,” the authors wrote referring to money laundering/terrorism financing.
In essence, the thrust of the report is this: the FATF believes stablecoins must fall under the same standards that stop other virtual assets from being used for criminal practices.
The stables have turned
The FATF’s report follows a 12-month review that was prepared for G20 finance ministers, as well as central bank governors. Although the FATF only has 37 official members, more than 200 countries implement its policies, as failure to do so in practice excludes them from the world financial system. In June 2015, following the infamous Mt. Gox crypto exchange heist, the body issued its “Guidance of Risk-Based Approach to Cryptocurrencies.”
Greater regulatory scrutiny would mean cryptocurrency exchanges that list stablecoins—as well as issuers such as Tether and Libra—would need to monitor transactions. Exchanges that list these assets would also need to verify the identities of those purchasing them.
“The revised FATF Standards clearly apply to so-called stablecoins,” the report said, referring to measures last updated in June 2019. “Under the revised FATF Standards, a so-called stablecoin will either be considered to be a virtual asset or a traditional financial asset depending on its exact nature.”
It is now urging all jurisdictions that follow its policies to implement these standards on stablecoins “as a matter of priority”—with the FATF planning to review the impact this has had in June 2021. In particular, the task force has called on the G20 “to lead by example.”
In completely unrelated circumstances this week, it emerged that Tether has blacklisted 39 Ethereum addresses that have been holding USDT worth $46 million since November 2017. Stuart Hoegner, who serves as general counsel at Tether’s sister company Bitfinex, told The Block: “Tether routinely assists law enforcement in their investigations… Through the freeze address feature, Tether has been able to help users and exchanges to save and recover tens of millions of dollars stolen from them by hackers.”
Also on July 7, a state appeals court ruled that Bitfinex must face claims by New York’s Attorney General Letitia James that it concealed the loss of more than $800 million in client and corporate funds stolen by a con man. Tether surreptitiously loaned Bitfinex at least $700 million, temporarily dropping its long-held claim that each USDT coin is backed one-to-one by a U.S. dollar.
“Today’s decision validates our office’s ability to use its broad and comprehensive investigative powers to protect New Yorkers,” James said in a statement. “Not even virtual currencies are above the law. We are pleased with the court’s decision, and will continue to protect the interest of investors in the marketplace.”
Tether’s market cap has effectively doubled since the start of the year—with billions of USDT entering circulation since March.
The FATF’s stance could further complicate matters for Facebook, which is still battling to get its controversial Libra stablecoin off the ground.
Back in April, the Libra Association released a rewritten white paper in its quest to appease regulators—simultaneously applying for a payment system license from the Swiss Financial Markets Supervisory Authority. A month later, its Calibra wallet was rebranded as “Novi.”
Even without the FATF flexing its muscles, some believe that projects such as Libra are doomed to fail because they have “insoluble problems.”
UC Berkeley professor Barry Eichengreen, speaking at the Unitize conference on July 10, was quoted by Cointelegraph as saying: “Libra is an interesting idea that will never see the light of day.”
He said he had attended a series of lunches with the founders and funders of prospective stablecoins, but the economic historian said: “My conclusion was that my luncheon companions knew all about blockchain, but they didn’t know much about monetary economics. Stablecoins are either fragile—they are prone to attack and collapse if they are only partially backed or collateralized with actual dollars or dollar bank balances, or they are prohibitively expensive to scale-up if they are, in fact, fully or over-collateralized.”