Photo illustration: Intelligences
If there’s one lesson crypto companies should have learned from this year so far — just eight months that have seen roughly $2 trillion in value evaporate — it’s that the world’s continued existence doesn’t depend on them being there. However, this was not always the case. Last year, the US Treasury Department issued a report on a specific subset of the crypto world known as stablecoins (which are supposed to stick to a fixed value, like $1) and the potential for their collapse to trigger a Lehman Brothers-style financial implosion. One such report gave the impression that some of these companies, particularly the one that issued Tether, the world’s largest stablecoin, were essentially too big to fail. But since then, some of the biggest stablecoins, pseudo-banks, and hedge funds have collapsed under their own weight since April, and while that has depressed this particular industry, it’s exactly zero percent of the reason the global economy has started to slow down. (The US, which accounted for about a third of all crypto holdings, still continues to do well.)
So what’s happening right now between the Treasury and Tether is a bit strange. Over the past year, the federal department has increased regulation of cryptocurrencies and recently blacklisted a company called Tornado Cash that dives deep into financial fracas by anonymizing crypto transactions — a tool allegedly used by North Korean hackers to launder around $500. millions in stolen cryptocurrency. Tether was not accused of any wrongdoing. But since the Treasury has come down against the anonymization service, Tether has gone ahead and continued to allow crypto wallets that are otherwise not grata to use the digital tokens.
Per Washington Mail:
One crypto company that has attracted scrutiny from US regulators and law enforcement in the past, Tether, may be in violation of the Treasury’s new rules. According to a Washington Post analysis of data from Dune Analytics, a crypto-intelligence firm, Tether does not blacklist accounts linked to Tornado Cash.
So far, the US government has not taken action. “Tether has not been contacted by US officials or law enforcement with a request” to freeze Tornado Cash transactions, Tether’s chief technology officer, Paolo Ardoino, said in a statement, adding that the company “normally complies with requests from US authorities.”
Chutzpah is the word that comes to mind. Sanctions are a tool of economic isolation, a way to crush a company or country by starving it of economic resources. They are also public. Anyone with an internet connection can see what the sanctions are. To say, essentially, “Yeah, well, the government hasn’t specifically gone out of its way to tell us whether we can do this or not” is not the normal course of business when it comes to state sponsors of terrorism. North Korea has been a surprising blind spot for the crypto industry, with former Ethereum programmer Virgil Griffith going to prison after pleading guilty to helping the country evade sanctions.
What’s striking about this is how Tether’s response to all of this—that the rules don’t apply—feels like a loser after a long period where it seemed like crypto companies could do whatever they wanted. At the bottom of the story, Tether makes the argument that it’s essentially a Hong Kong company, so it doesn’t have to listen to what the Treasury says. But that’s not how it works, especially since Tether has previously submitted to US regulation and even settled with New York’s attorney general over fraud. The reality is that if money flows through the US financial system, the federal government gets to largely control it.
That’s enough good arguments against sanctioning Tornado Cash and other anonymization services, but these are not the arguments Tether makes. But whether Tether can really get away with doing this is another question entirely. Tether has lost about a quarter of its holdings since its peak in November, a run that saw the digital currency drop slightly from the $1 mark. (It has since regained its dollar peg). At the same time, money poured into its biggest competitor, USD Coin, which basically does the same thing. In fact, there are all kinds of stablecoins out there that basically do the same thing, and the big, big splash of money this year has shown that the status of “too big to fail” is far from certain. The fact that it wants to throw its weight around now, and on North Korea of all things, is one hell of a way to test how systemically important it really is.
