The knife fight for stablecoin supremacy

The world’s two largest stablecoin issuers are locked in a Darwinian struggle for survival; each convinced that there’s only room for one atop the big crypto mountain.

On March 3, the Tether (USDT) stablecoin issuer announced the appointment of Simon McWilliams as its new chief financial officer “as the company takes a historic step toward a full financial audit.” McWilliams, a senior business advisor at fintech firm WizzFinancial, previously occupied the CFO role at investment manager LetterOne and was chief operating officer at hedge fund Quantmetrics Capital, along with stints at other tradfi companies.

Tether claims McWilliams’ appointment represents “a firm commitment” to the company completing a full financial audit, something it has steadfastly refused to do since its inception. During that decade of denial, Tether execs have made repeated pledges to conduct a proper third-party inspection of its accounts, including a July 2021 CNBC interview in which the company’s former general counsel, Stuart Hoegner, claimed an audit was “months, not years” away.

Instead, Tether has issued quarterly ‘attestations’ that provide only a single day’s snapshot of the financial reserves backing its (currently) $142.5 billion in issued USDT. BDO Italia, the company currently tasked with conducting these attestations, expressly disavows any knowledge of what Tether’s books look like on any day before or after Tether provides this 24-hour snapshot of its accounts.

Tether now claims that an audit “is a crucial step in Tether’s broader strategy to expand across the institutional financial system.” Translation: regulators are finally catching on to the dog’s breakfast of assets in our reserves, including gold bricks, volatile BTC tokens, questionable loans to parties unknown—the latter possibly including related parties—and unspecified ‘other investments.’

Stablecoin legislation currently winding its way through Congress threatens Tether’s future participation in the U.S. market by requiring issuers to hold all their reserves in U.S. Treasury bills or their cash equivalents. The two competing bills also require third-party reviews of issuers’ reserves. Tether clearly recognizes that it’s now facing a ‘comply or complain’ ultimatum that threatens its position as the dominant stablecoin issuer.

Tether CEO Paolo Ardoino tweeted that his company was “laser focused on transparency, doubling down our efforts for a full audit.” But since those efforts were heretofore nonexistent, doubling ‘zero’ still leaves you with zero, and not everyone is convinced that this is anything more than a rehash of perpetually broken promises.

Binance increases Tether’s European woes

Tether’s efforts to placate U.S. authorities appear aimed at avoiding the fate it’s suffering in the European Economic Area (EEA). USDT is being expelled from EEA markets due to other digital asset companies’ efforts to comply with the European Union’s Markets in Crypto-Assets (MiCA) regulations.

The same day that Tether announced its new CFO, the Binance digital asset exchange announced that as of March 31, “all trading pairs associated with non-MiCA compliant stablecoins, such as USDT, FDUSD, TUSD, USDP, DAI, AEUR, UST, USTC and PAXG, will be delisted for EEA users.”

Other exchanges, including Coinbase (NASDAQ: COIN), Crypto.com, Kraken, OKX, and more, have already restricted EEA access to noncompliant stablecoins. And just as Coinbase did at the time of its USDT purge, Binance is encouraging EEA customers to convert their noncompliant stables to Circle’s USDC “as soon as possible.”

USDC, which Circle issues via a partnership with Coinbase, was deemed MiCA-compliant last July. USDC’s current market cap of $58.8 billion is barely 40% of USDT’s cap, but USDC has nearly doubled its cap over the past year. USDT has grown only 40% over the same span, reflecting the global compliance crackdown that shows little sign of abating.

Tether’s audit won’t resolve its EEA woes, as MiCA requires ‘significant’ stable issuers to hold 60% of their reserves in cash in local banks. Ardoino insists that this presents a significant threat to USDT’s solvency due to banks’ fractional reserve policies and the damage that USDT would suffer in the event of a bank failure.

Regardless, the stablecoin market appears to be dividing along a regulated/unregulated axis, with Circle doing what it takes to garner local approvals to operate while Tether has until recently seemed content with serving as the token of choice among less savory digital asset fans.

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USDC winning in Japan, USDT not giving up in UAE

This week, Circle announced that SBI VC Trade, a digital asset exchange controlled by Japanese financial services firm SBI Holdings (NASDAQ: SBHGF), had received the nation’s first Electronic Payment Instruments Exchange Service Provider permit. The permit, issued by Japan’s Financial Services Agency (FSA), is required for entities seeking to process payments using ‘offshore’ stablecoins like USDC.

The FSA lifted its ban on foreign stablecoins in mid-2023, and Circle struck a deal with SBI later that year to launch USDC in the country. On March 12, SBI VC Trade will launch a beta of its USDC services for “a limited number of users” with a “full scale” ramp-up to follow “as soon as possible.”

SBI VC’s announcement of its new permit stressed USDC’s reserves being “highly liquid cash and cash equivalents” stored in “reliable financial institutions, and monthly certification reports are conducted by third-party institutions, ensuring high transparency.”

Tether isn’t completely sitting on its hands in this fight. Last December, USDT was recognized as an Accepted Virtual Asset in the United Arab Emirates capital of Abu Dhabi, allowing it to be used for ‘pre-approved services’ by ‘authorized persons.’ Last month, Tether signed a deal with UAE-based B2B real estate platform Reelly Tech to allow local residents to settle property transactions with USDT.

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Devasini wants to Allaire to die screaming (probably)

Tether’s announcement of a new CFO included the news that its previous CFO Giancarlo Devasini—in reality, its co-founder/majority shareholder cosplaying as the guy running Tether’s lone spreadsheet—will now assume the role of ‘Chairman of the Group.’ This chair appears to have previously been unoccupied, raising questions as to what exactly Devasini will do with his free time… that is, when he’s not plotting revenge on Circle.

Devasini gets a lot of play in a new Wall Street Journal (WSJ) article on the ’kill-or-be-killed fight’ between Tether and Circle over which will become the global stablecoin superpower. The article quotes Devasini accusing Circle of being “behind every single attempt to bad-mouth Tether” and claiming Circle CEO Jeremy Allaire wants to ‘regulate Tether out of existence.’

But the article also quotes a defiant Devasini saying, “Circle will not win if Tether is alive.” To ensure its survival, Tether cultivated high-powered friends in the U.S., including Howard Lutnick, the recently confirmed Secretary of Commerce. Lutnick is also the founder of Wall Street financial firm Cantor Fitzgerald (NASDAQ: ZCFITX), which not only custodies Tether’s $100 billion+ in T-bills but also negotiated a ‘convertible bond’ last year that may be worth as much as 5% of Tether.

Devasini has told associates that Lutnick—a longtime friend of President Donald Trump—shares his dislike of Circle and has promised to work to kill any bills in Congress that would harm Tether’s operations. Asked about Devasini’s claims during his confirmation hearings, Lutnick played coy, saying only that he’d “never do anything improper with respect to Tether.”

The WSJ said Lutnick “helped Devasini cultivate ties to the Trump camp,” including the Cantor-brokered deal that saw Tether take a $775 million stake in Rumble (NASDAQ: RUM), the right-wing video-sharing platform, whose CEO Chris Pavlovski is a close friend of Donald Trump Jr.

Another close ally of the president, Richard Grenell, Trump’s new presidential envoy for special missions, recently expressed agreement with critics of the new stablecoin bills and their apparent antagonism toward “centralized international stablecoin issuers” like Tether.

Asked for comment regarding Tether, Allaire said Circle wasn’t focused on the “unregulated money world,” which is a pretty meeooww way of saying ‘no comment.’ But as an American citizen, Allaire can freely walk the halls of Congress, while Devasini gives the entire country a wide berth for fear he’ll be arrested the moment he steps off the plane.

The article claims Devasini “wants crypto to stay true to its swashbuckling, antiestablishment roots.” If by ‘swashbuckling’ you mean ‘lawbreaking,’ well, mission accomplished.

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Frozen out

Believe it or not, there is one aspect of stablecoin operations in which Circle appears to be the regulatory laggard—the always thorny issue of centralized issuers freezing tokens on-chain when it’s clear the tokens are linked to criminality.

In December 2023, Tether abruptly began complying with law enforcement—particularly U.S. law enforcement—requests to freeze tokens involved in things like evading U.S. economic sanctions. Tether’s new “voluntary wallet-freezing policy” was a 180° shift from its previous ‘who-gives-a-shit’ policy, which Tether claimed was necessary because freezing tokens could be “disruptive and reckless.”

Since then, Tether has loudly trumpeted each and every freeze as evidence that it’s one of the good guys. Tether is less vocal about the fact that these actions are often taken long after the wallets in question have been emptied of their ill-gotten gains and the proceeds converted to other tokens via exchanges, coin mixers, or cross-chain bridges.

Enter Circle, which has long been criticized for its lack of attention to freezing requests. Take the recent $1.5 billion hack of the Bybit exchange by North Korea’s Lazarus Group. While Tether promptly froze some 181,000 USDT linked to the hack, Circle was publicly called out for its slow response in freezing 115,000 USDC despite ample evidence that the tokens were linked to the hack.

The accusation was made by ZachXBT, the blockchain sleuth who won a bounty for being the first to offer definitive proof that linked the hack to Lazarus. Circle’s Allaire took exception to being called out in this fashion, saying the company has a policy to “immediately respond” to law enforcement requests but wouldn’t “front run the law with our own or market intel.”

ZachXBT wasn’t buying it, saying Circle “completely made up this internal policy and it’s not required by law.” ZachXBT said a hack of this magnitude “impacting the entire ecosystem only has minutes for a blacklist.” ZachXBT went on to cite five other incidents over the past three years in which he claimed Circle “failed to act when given the chance.”

ZachXBT summed up his views by arguing that Circle’s internal policy “might not be the most effective strategy.” He urged Circle “to be more proactive for clear cut hacks/exploits where it’s obvious (as multiple of your competitors already do).”

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