After China Strikes Hard, S&P Global Raises Alarm: USDT Stablecoin May Be Banned in the U.S.!

After China's aggressive move against the world's largest dollar stablecoin, USDT, at the end of 2023, S&P Global issued a warning this week. U.S. Senators Kirsten Gillibrand and Cynthia Lummis have proposed a new stablecoin bill that heavily favors banks, which could lead to a U.S. ban on USDT issued by Tether.

According to the newly proposed Lummis-Gillibrand Payment Stablecoin Act, the bill plans to ban algorithmic stablecoins and requires issuers to have a 1-to-1 reserve to back their tokens, along with implementing an anti-money laundering framework. S&P Global, as a rating agency, noted that most dollar stablecoin issuers, including USDT, which has the highest market share, are currently not subject to U.S. regulations.

S&P Global highlighted that the bill authorizes state non-depositary trusts (non-banks) registered with the Federal Reserve to issue up to $10 billion in stablecoins, with no limits for depositary institutions.

Thus, if the bill is approved and banking regulations are complied with, the new rules could restrict non-banking licensed institutions to a maximum issuance of $10 billion, giving a competitive edge to banks.

S&P Global continued, stating that the bill is unlikely to significantly impact stablecoins already regulated by the New York Department of Financial Services (NYDFS), such as PayPal USD, Gemini USD, and Paxos USD, as their issuance is well below the $10 billion threshold and generally follows NYDFS guidelines in other respects.

However, the agency emphasized that if the bill passes, Tether's global dominance in the stablecoin market could slow, mainly because it is an unregistered issuing entity in the U.S.

The article states, "Tether is issued by a non-U.S. entity and thus does not qualify as a payment stablecoin allowed under the proposed bill, meaning that U.S. users could not hold or trade Tether, which might decrease demand while boosting U.S.-issued stablecoins."

But S&P Global noted that Tether's trading activities mainly occur in emerging markets outside the U.S., driven by general users and remittances.

Key provisions of the Lummis-Gillibrand Payment Stablecoin Act, as summarized by S&P Global, include:

1. Authorization for state non-depository trust companies (non-banks) registered with the Federal Reserve to issue up to $10 billion in stablecoins, with no threshold for depositary institutions;
2. Transitional arrangements to allow existing stablecoin issuers to continue operating before new approvals;
3. Ban on algorithmic stablecoins;
4. Reserve requirements including asset segregation, full backing of all circulating stablecoins, and limiting reserve assets to cash, bank deposits, treasury bills maturing within 90 days, repurchase agreements due within 7 days, and deposits at the Federal Reserve;
5. Monthly disclosures of assets and regulatory non-compliance;
6. Mandatory redemption of stablecoins within one business day;
7. Oversight and resolution by the Federal Deposit Insurance Corporation for insolvent stablecoin issuers;
8. Clarification that custodians' digital assets should be considered off-balance sheet assets, like other custodial financial assets.

Besides the U.S., China also took action earlier last year.

At the end of December 2023, China's Supreme People's Procuratorate, in conjunction with the State Administration of Foreign Exchange, released significant information on eight typical cases of foreign exchange-related crimes, mentioning that converting cryptocurrencies like USDT to RMB constitutes illegal foreign exchange trading. An increasing number of foreign exchange crimes are being carried out through cryptocurrency transactions. The Supreme Procuratorate emphasized the need to strengthen the coordination between administrative and criminal measures to legally combat illegal cross-border financial activities.

The director of the Fourth Prosecution Office of the Supreme Procuratorate stated that the cases released mainly target cross-border knock-on type foreign exchange crimes. In these cases, RMB and foreign currencies typically do not physically cross borders; instead, funds appear to circulate unidirectionally within and outside the country, effectively constituting disguised foreign exchange trading, which disrupts the foreign exchange market order. In severe cases, this constitutes the crime of illegal business operations.