The U.S. Senate Committee on Banking, Housing, and Urban sent a letter to so-called “stablecoin” issuer Tether on Tuesday, asking for an explanation of how the company operates and “mints” tethers that can be exchanged for various forms of cryptocurrency like bitcoin. Why does it matter? Because some people believe that not only is Tether committing fraud, they worry Tether’s possible collapse as a digital form of currency could cause the entire cryptocurrency market to fall right along with it.
The letter to Tether, addressed to CEO Jean-Louis van der Velde, was spearheaded by Senator Sherrod Brown, a Democrat from Ohio, who expressed concerns that, “stablecoins present investor protection risks and raise several market integrity concerns.” That’s a polite way of saying this incredibly sketchy industry has gotten too big for its britches.
Stablecoins like tether are pegged to the U.S. dollar and theoretically consumers can trade one U.S. dollar for one tether. Why would someone want to do this? Stablecoins are most commonly used to swap cryptocurrency, which can be difficult to buy and often require an intermediary currency.
As Bloomberg News reported in October, there were 69 billion tethers in circulation, which means that Tether as a company should be holding $69 billion in U.S. currency or something equivalent. That number is $73 billion and growing. And it almost certainly is not holding that much money.
If Tether the company did have that much in real money lying around, it would make it one of the largest banks in America. But the fact that it probably doesn’t means there’s something deeply unsettling going on—something that could have the power to disrupt the cryptocurrency markets, which are large enough to potentially disrupt the traditional financial system.
“I have significant concerns with the non-standardized terms applicable to redemption of particular stablecoins, how those terms differ from traditional assets, and how those terms may not be consistent across digital asset trading platforms,” Sen. Brown in his letter to Tether.
Brown’s letter includes six questions:
- Please describe the basic purchase, exchange, or minting process[es] by which customers can acquire Tether for U.S. dollars. In your answer, explain any relevant limitations or qualifications to engaging in and completing that process.
- Please detail the process to redeem Tether and receive U.S. dollars. Here, also, identify any requirements or limits, including any minimum redemption size, waiting period, or qualifications.
- Since Tether’s inception, how many Tether tokens have been issued, and how many have been redeemed? Over the last 12 months, what is the greatest percentage of the Tether in circulation at the beginning of a calendar week to be redeemed in the subsequent seven days?
- Briefly characterize the market or operational conditions that would prevent the purchase, or redemption, of Tether for U.S. dollars, or another digital asset. For purposes of answering this question, do not list or describe legal or regulatory limitations currently described in a user agreement or terms of service. For each condition identified, please provide at least one example that occurred in the past 12 months and its duration.
- Please identify any trading platforms that have enhanced capabilities, privileges, or special arrangements with respect to Tether, identifying those features and their basis (e.g., contractual or common control).
- Please summarize any internal reviews or studies your company has conducted about how specific levels of redemptions would affect Tether, including its convertibility into U.S. dollars, or would affect the financial position of your company.
Tether isn’t the only stablecoin issuer in the Seante’s sights, just one of the most important. Brown also sent letters to Coinbase, Gemini, Paxos, TrustToken, Binance.us and Centre.
What happens now? Well, we wait. Tether has ten days to respond to the letter, according to the Senate. And Brown was quick to note he’d like to hear the responses in “clear, straightforward terms.”
What are the odds that CEO Jean-Louis van der Velde responds by December 3? Not great. He hasn’t been seen or heard from in a very long time.