In a February 15 Congressional hearing, Caroline Hill, Senior Director for Global Policy and Regulatory Strategy at Circle, has called on Congress to grant the Treasury Department the authority to go after Tether and its banking partner Cantor Fitzgerald. Hill said that the US Treasury Department should have the authority to take action given “Tether’s reputation” as well as available data that “they are contributing to terrorist financing and other malign activities.”
Is Tether Contributing to Terrorist Financing?
The stablecoin Tether USDT on its own isn’t directly affiliated with any terrorist organization. However, terror groups have leveraged the anonymity of the blockchain to finance their activities using Tether. A post by Chainalysis revealed how Israeli authorities intercepted over $1.7 million of terrorism sponsorships for Hezbollah and Iran’s Quds Force.
Yoav Gallant, Israel’s Defence Minister, said it was the first time Israel’s National Bureau for Counter Terror Financing (NBCTF) seized digital currency intended for terrorism in its onslaught against terror. Surprisingly, all the funds seized from 40 wallet addresses in the NBCTF’s digital raid were in USDT on the Tron Network. The Bureau confiscated the funds and transferred them to Israel’s Treasury, while Tether froze four of the associated accounts, according to Chainalysis.
As of October 2023, Tether had frozen 32 wallet addresses containing over $873,000 linked to illegal activities in Israel and Ukraine. Contrary to popular belief, Tether CEO Paolo Ardoino said that cryptocurrencies “are the most traceable and trackable assets” and maintained that his company has consistently worked with the NBCTF and similar bodies to stand as a “robust defense against cybercrime”.
Tether in the US Regulatory Landscape
Although Tether executives claim it is regulated by the FinCEN (Financial Crimes Enforcement Network), the stablecoin is only registered with the bureau. In a 2020 tweet, Ardoino, the company’s CTO, maintained that Tether is “as regulated under FinCen as other centralized competitors.” He cited strict KYC (Know Your Customer) and AML (Anti Money Laundering) Compliance efforts as proof of FinCEN’s oversight over the company.
However, registration with FinCen doesn’t exactly mean regulatory oversight. It simply means that it has an account with FinCen for submitting SARs (Suspicious Transaction Reports) as well as $10,000 CTRs (Cash Transaction Reports). Besides that, Tether also implements KYC requirements for all its customers. These functions provided by Tether under its FinCen registering are considered too basic and insufficient for comprehensive regulation.
To be sufficiently regulated, Tether is expected to register with any of the state financial services departments that are in charge of regulating Money Services Businesses in the US. By registering with state regulators, everyone can be sure that it follows the securities investment guidelines and minimum net worth requirements of the regulators.
The stablecoin provider is also required to provide annual audits of financial statements and allow background checks on its executives to prevent money laundering and other forms of fraud. Tether (USDT) has yet to align with the traditional regulatory system in the US, which is why big names like Circle’s Caroline Hill call for Congress to take swift action in that regard.
Tether USDT vs USDC in the Regulatory Front
Unlike USDT, Circle’s USDC has very transparent regulatory compliance. The stablecoin (USDC) is regulated by the New York State Department of Financial Institutions and audited by BlackRock and BNY Mellon. Such compliance with conventional regulation gives it the edge over USDT in that regard.
Regardless of the USDC’s regulatory sentiment and controversies surrounding Tether (USDT), Tether still maintains higher utility and more than thrice the market capitalization of USDC. Hill in her testimony to Congress added that she “believes no company should be allowed to reference the US dollar without having those democratic values.” Tether fans see her appeal to Congress as an attempt to puncture competition, however, regulating USDT will increase transparency and lower Illicit use of the stablecoin.