The Biden Administration’s secret crypto strategy is becoming clear: it wants to force stablecoin issuers into the arms of big banking.
“Just because you’re paranoid doesn’t mean they aren’t after you.” That adage has been attributed to everyone from Henry Kissinger to Kurt Cobain, but these days it would be a fitting motto for the crypto industry.
In 2021, crypto believers became convinced that the U.S. government has it in for them. And not without reason: a series of decisions by the SEC and other regulators suggested that federal officials are not just indifferent to the industry, but actively hostile to it.
The question is why. While many crypto advocates insist the government is corrupt or inept, the reality is that the Biden Administration is pursuing a crafty strategy to tame an industry it views as a threat.
Interviews with former regulators and executives at top crypto firms reveal a sophisticated plan not to crush crypto, but to co-opt it by handing a core part of the crypto industry—stablecoins—to the big banks. Doing this, regulators believe, will bring the free-wheeling crypto economy to heel.
“It’s a very thought-through doctrine about how to stop the crypto industry from growing too fast and too much,” says Maya Zehavi, a crypto entrepreneur and investor who has advised regulators.
Who exactly is behind the strategy? While many view the ambitious SEC Chair Gary Gensler as the architect of the Biden Administration’s anti-crypto policies, his influence has been overstated. It is instead Treasury Secretary Janet Yellen, Senator Elizabeth Warren, and a clique of Federal Reserve veterans who appear to be calling the shots.
According to Zehavi and others, the Biden Administration doesn’t want to kill stablecoins altogether. Instead, the aim is to cull what these lawmakers perceive as “shadowy” operations like Tether while bringing “regulator-friendly” ones like Circle and Paxos under the umbrella of the U.S. banking system.
Recent actions by regulators suggest the plan is already underway. The question now is whether the crypto industry can avoid being owned by the same big banks it set out to disrupt.
Stablecoins: The key to taming crypto
Bitcoin was born in 2008, but it would take more than a decade for the U.S. government to take crypto seriously. When it finally did, it was because of stablecoins.
According to Jerry Brito, executive director of the non-profit Coin Center, Facebook’s announcement in 2019 that it would launch its own digital currency was a watershed moment. The company said the currency, originally called Libra, would be a stablecoin pegged to a basket of government-issued currencies.
Facebook was hardly the first to hit on the idea of a stablecoin. As early as 2014, crypto users have relied on digital tokens pegged to so-called fiat currencies like the U.S. dollar or the euro. But when Facebook announced it would offer a stablecoin to its more than 2 billion users, Congress snapped to attention. The company’s crypto ambitions represented not just a new product but a challenge to governments’ power over the purse. As crypto lawyer Preston Byrne wrote at the time, “If Facebook raised an army, this would be only slightly more hostile to the people of the United States.”
While stablecoins have yet to enter the mainstream, they have become a critical part of the crypto industry. Tokens like Tether’s USDT and Circle’s USDC provide a shelter from volatility, while also letting traders avoid the fees that typically come with moving money back to traditional currency. And it doesn’t hurt that stablecoins make it easier to avoid the tax and legal regimes that kick in whenever a customer touches so-called “fiat rails” where traditional banks operate.
All of this comes as the U.S. Treasury has grown sensitive to challenges to its sovereignty, including efforts by geopolitical rivals Russia and China to weaken the dollar’s role as the world’s reserve currency. While China has promoted its digital yuan as one alternative, America’s antagonists would be equally pleased if Bitcoin or another cryptocurrency replaced the dollar in global commerce. These geopolitical considerations help explain the blowback to Facebook’s Libra project (and to crypto writ large).
Political backlash all but neutered Libra, but the broader stablecoin market is still flourishing. Today its market cap sits around $155 billion while trades involving stablecoins account for more than 70% of all crypto transactions on any given day. And this could be just the beginning. Circle, the second-largest issuer of stablecoins, told its investors in July that the value of USDC in circulation could reach $194 billion by 2023—an amount that matches the GDP of Greece.
Circle, which is allied with crypto giant Coinbase, has long touted its efforts to stay on the right side of regulators—even as the company has been entangled in an SEC investigation and controversies over its reserves. Tether has been dogged by more serious allegations related to sketchy accounting practices, and questions of whether some stablecoins are actually backed by dollars at all. The company has already been fined $41 million by the CFTC and $18.5 million by the state of New York, and is the subject of multiple federal investigations over what exactly backs its stablecoin.
All of this has led stablecoins to become the prime target in the federal government’s belated attempt to oversee the crypto markets. The response has included a January report from the Federal Reserve that discussed the potential for a central bank digital currency, but concluded the Fed would not act without a clear mandate from Congress and the White House.
Far more significant was a report published in November by the President’s Working Group, an inter-agency group of the country’s most senior financial regulators, including Yellen. Titled “Report on Stablecoins,” the document called on Congress to pass laws requiring stablecoin issuers to operate as banks and to restrict their “affiliation with commercial entities.”
The report also stated that regulators may take the step of labeling stablecoin issuers as “systemically important,” a designation created in the wake of the 2008 financial crisis to oversee institutions that, in the parlance of those times, are “too big to fail.”
Few people think the report’s authors are serious about treating stablecoins as too big to fail. Unlike the massive insurer AIG, which fell into that category, stablecoins are not interwoven with the rest of the U.S. financial system.
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