Editor's Note: This article comes fromMengyan Finance (ID: Meng-eyes), reprinted by Odaily with authorization.
Editor's Note: This article comes fromMengyan Finance (ID: Meng-eyes)Mengyan Finance (ID: Meng-eyes), reprinted by Odaily with authorization.Newcomers to the crypto space are quickly confronted with a common distinction between regulated and unregulated stablecoins. But what is the difference between the two? Tether, the largest of the stablecoins, is often described as unregulated. But Tether executives and backers disagree. So, who is right?Tether is the most popular medium of exchange in the crypto economy. With nearly $25 billion worth of its U.S. dollar Tether stablecoin, it has become one of the world's largest non-bank issuers of U.S. dollars. Keep in mind that PayPal's outstanding balance is about $32.5 billion. It took PayPal over 20 years to get to this level, Tether did it in just 6 years!Tether's story is all the more intriguing because for years it has been dogged by speculation that its reserves were insufficient. In fact, New York Attorney General Letitia James is currently investigating Tether’s affiliate Bitfinex for allegedly violating New York securities laws and using Tether’s reserves to cover up losses.For potential users of stablecoins, it is easy to be confused by these redundant signals. Tether's incredible growth means a high level of market confidence in the stablecoin, yet rumors about its reserves keep coming back.A rule of thumb that anyone can use when building trust in a financial institution is the presence or absence of regulation. Is there a neutral government agency that oversees or regulates the financial institution's finances? If so, it provides a layer of protection for the user.Unfortunately, even the topic of regulation can get confusing. Podcaster Laura Shin recently had a conversation with Tether’s banker, Gregory Pepin, Deputy CEO of Deltec. Pepin echoes recent allegations that Tether does not have a sufficient amount of dollars in its bank account to cover each Tether issuance. When Shin asked Pepin if Tether was regulated, the conversation turned to regulation.Pepin: Regulators related to Tether, Paxos, and USD Coin are all registered with FinCEN. And that means, for AML and KYC, that's what matters because if you look at all the comments by Janet Yellen, it's about money laundering and terrorism. And at that level, they're all regulated in the same way, and they're both registered with FinCEN.In his response, Pepin insisted that Tether is regulated. And he believes that it is Tether's registration with FinCEN that gives Tether a regulated status, making it registered with FinCEN like stablecoin competitors such as USD Coin.Note: FinCEN is the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury responsible for developing rules to combat money laundering.Tether’s CTO, Paolo Ardoino, made the same claim, saying that Tether is on par with other stablecoins because it is “regulated by FinCEN.”Tether’s general counsel, Stuart Hoegner, suggested the same. In response to a question on Twitter about how Tether would be regulated, Hoegner suggested that it was Tether’s registration with FinCEN that qualifies Tether as a regulated financial institution.So, this news may assuage the concerns of crypto newbies about Tether support. Tether is regulated, so users are presumably protected.Unfortunately, this statement is misleading.In other words, Tether is not regulated by FinCEN, but only registered with FinCEN. These two R (Rigister registration / regulated supervision) are completely different. When an institution registers with FinCEN, it means that FinCEN provides it with an electronic account to upload a Suspicious Transaction Report (SAR) and a Transaction Report (CTR) for $10,000 in cash. Registered entities must also take steps to collect and verify the identity of customers, as required by FinCEN.While Tether’s choice to register with FinCEN, collect customer information, and regularly file SARs is commendable, there is nothing special about this status. Even Dale & Jackie's Discount Liquor, based in Decatur, Illinois, is registered with FinCEN.Also, take note of the disclaimer that FinCEN appended to the bottom of Dale & Jackie's registration status. "Businesses included on the MSB Registration Search web page are not a recommendation, legal certification, or endorsement of that business by any government agency." So, in other words, neither Dale & Jackie's Discount Liquor nor Tether should be listed on FinCEN registration as a sign of regulatory approval. And that's exactly what Deltec and Tether executives are doing on Twitter and in podcasts.New users of stablecoins need to understand that FinCEN does not provide a financial regulatory framework for Tether, PayPal, or Dale & Jackie’s money services business. That said, FinCEN doesn't care about Dale & Jackie's capitalization or its net worth. It does not check that the dollars created by these issuers are 100% backed.We have an independent set of government agencies that review the capital adequacy and adequate support of money services businesses. In the United States, financial regulation of money services businesses is carried out by individual state departments of financial services.PayPal, which I mentioned above, is regulated as a money services business in over 50 different states in the US. Circle and Coinbase, which jointly issue the second-largest stablecoin, USDC, are already licensed by several state financial services departments.Each state's financial services regulator has its own rules, but in general they all require money services businesses to limit their investments to a list of permissible securities, post a bond or letter of credit with the regulator as security, and/or maintain minimum net worth requirements. In addition, money services businesses must provide their state's financial services regulator with audited annual financial statements, subject to review as necessary. State regulators often mandate background checks on officers and directors to guard against fraud.Stablecoins Paxos standard and Gemini dollar are regulated somewhat differently from USDC. Issuers Gemini Trust and Paxos Trust are licensed by a single state department of financial services, the New York State Department of Financial Services (NYDFS), to operate as limited purpose trust companies. To qualify, they must meet the same standards as banks.Thus, the peculiarity of PayPal, Coinbase, Circle, Gemini Trust, and Paxos Trust is that they are all able to tell the public that the dollars they issue must comply with a specific financial regulatory framework created for money services businesses. That said, customers are somewhat guaranteed that regulators set quality standards for the dollars created by these issuers.In contrast, Tether is not regulated by the New York Monetary Authority. It is also not regulated by the financial services departments of any other US state.
