Tether, Circle Diverge on How to Tackle Global Patchwork of Stablecoin Rules

It’s an interesting question: How will Tether and Circle, the largest issuers of U.S. dollar-denominated stablecoins, evolve and expand as the rule-bound systems of traditional finance become increasingly enmeshed in the crypto economy?

So far these crypto power players have taken different paths.

Circle, which casts itself as the compliance-friendly option, echoes many regulators’ calls for global coordination. Tether, for its part, has adopted a hands-on, reactive approach that can be flexibly adapted for national variations, especially when it comes to fighting crime.

Rules on stablecoins should be harmonized, not balkanized, Dante Disparte, head of global policy and chief strategy officer at Circle, said in an interview.

“It’s not that those countries are making a mistake or doing something wrong; U.S. policy inaction is actually the gap,” and other countries are legislating to fill it, he said. “So that's the trend we should expect: A balkanization of the industry as more countries erect barriers and establish rules that favor having a local advantage.”

The imposition of the Travel Rule on digital asset transactions has created a standard in which the endpoints of crypto can be defended, Disparte said. “Now, imagine if there was also legislation imposed on stablecoins where the currency the stablecoin references set a floor on expectations around financial integrity, financial crime, compliance and a whole host of other standards,” he said.

Tether, which doesn’t serve U.S. customers and doesn’t intend to do so, views the stablecoin market in the image of the Eurodollar – Eurodollar deposits are held outside the U.S. and thus not subject to U.S. regulation. Tether sees the future in emerging markets and underbanked countries and is formulating its own approach to law-enforcement collaborations.

The company could claim that U.S. law agencies have no jurisdiction over it, but that would be stupid, CEO Paolo Ardoino said in an interview. Tether, in fact, volunteers to work with U.S. authorities like the Federal Bureau of Investigations (FBI) and the Department of Justice (DOJ), as well as some 40 law forces around the globe, he said.

“I think the Treasury should work with stablecoins in a proactive way,” Ardoino said in an interview. “We have tools like Chainalysis to follow whatever happens on the secondary market. And, by the way, almost everywhere there are no laws that stablecoins issuers are responsible for the secondary market. But I think it's our duty to monitor them just the same.”

Attempting to deal with crime in a speedy, hands-on manner is a source of frustration for the crypto industry, according to Ardoino. The Tether chief says his firm takes a proactive approach compared to its competitors by collaborating directly with law enforcement, bypassing the need for a lengthy judicial process that could take up to six months, during which the funds could be already dispersed. It's better to act swiftly to freeze funds upon contact from law enforcement, he said.

'When the DOJ needs to freeze assets, they reach out to us," Ardoino said. (He pointed out that Tether has successfully frozen over 600 million USDt in collaboration with U.S. law enforcement.) "We possess the capability to freeze assets with surgical precision. However, when the Treasury adds entities to the OFAC SDN list, it's instantaneous—they're gone in a minute. Ideally, they could approach us beforehand, saying, 'We're investigating these individuals, planning to impose sanctions. Could we freeze their assets before making it public?' This way, we can effectively lock down the funds."

OFAC is the Treasury’s Office of Foreign Assets Control and SDN stands for specially designated nationals.

Both firms have had their travails. A lot has been written over the years about the integrity of tether (USDT), the largest stablecoin, with a current market cap of $107 billion. The durability of Circle, whose USDC is one-third its size and with its ties to the U.S. banking system, looked rather touch and go at one point during the collapse of Silicon Valley Bank in 2023.

The contrast between Circle’s appeal to traditional financial values and Tether’s hands-on, reactive approach to crypto’s slings and arrows is illustrated in their reflections on the collapse of Terra’s UST stablecoin and its backing currency, Luna – arguably the first step that brought down a house of cards.

Some time before Terra blew up, Ardoino suggested the project was a “bad idea,” he said. His denouncement was met with scorn: Obviously he was going to be negative about the algorithmic stablecoin, he recalls people saying at the time, because it was a competitor that was going to steal some of Tether's market.

“Of course, Terra Luna happened and Tether was subjected to a lot of pressure, with people saying they would short us into the ground and cause a bank run,” he said. “But we managed to redeem $7 billion in 48 hours; $20 billion-plus in 20 days.”

Circle’s Disparte laments crypto’s avoidable “own goals” and how it managed to acquire such a “checkered scorecard” for a relatively young industry.

“If you comported with e-money rules or money transmission rules, which in the U.S. is a state-based regime, you would have protected principal, for example, with Terra Luna. People wouldn't have broken the buck,” he said.

CORRECTION (APRIL 16, 2024): Clarifies Paolo Ardoino’s comments regarding freezing assets