The Breakdown - Is the US Government Going After Tether?

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, October 28th, and today we are exploring whether the government is investigating tether. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, happy Monday. Well, according to a new report from the Wall Street Journal, government authorities are investigating Tether. The article claims the DOJ prosecutors based out of the Southern District of New York, but of course, are investigating the Stablecoin issue on criminal

Starting point is 00:00:51 charges. They are reportedly looking at possible sanctions violations and breach of anti-money laundering rules. Simultaneously, the journal reports that the Treasury Department is considering applying sanctions to Tether. The allegations are broadly a collection of the worst claims we've seen about Tether in recent years, namely that the stable coin is widely used by terrorist organizations and Russian arms dealers. Now, let's caveat this whole thing by noting that Tether FUD is one of the longest standing fuds in the entire crypto industry. Effectively since the beginning of time, there have been a never-ending stream of reports, and certainly for Tether's part, they've been very vocal about how much more integrated with law enforcement they are. Indeed, that's the part that's

Starting point is 00:01:32 maybe a little bit hard to reconcile here. These are not reports about how Tether was six years ago, but a current investigation. And regardless of what one thinks of the claims, the reason it's worth looking into at least this reporting a little bit more is that this contains far more details than usual about the departments conducting the investigation and where they are in the process. It's reminiscent, frankly, of reporting around the investigations into Binance last year. Those reports began by distributing details of the allegations being investigated, with the reporting becoming more clear and well-sourced as the investigation progressed. As we got closer to the Binance settlement, it frankly seemed as though

Starting point is 00:02:07 the reporting was being used as part of an internal push towards bringing charges. In other words, the reporting itself was being used as a tool to raise the profile of the case. From a speculative standpoint, and particularly for those tracking what some have been calling the rise of lawfare, there is a certain logic to a crackdown on Tether right now. We're deep in an election season where one of the major Trump surrogates is an outspoken Tether supporter. Howard Lutnik, the CEO of Cantor Fitzgerald, has publicly stated that he manages a portion of Tether's U.S. Treasury reserves. Some $80 billion worth, according to Tether's reserve attestations, although they're likely distributed among several custodians. Letnik has also been appointed as co-chair of the Trump

Starting point is 00:02:46 Vans transition team. The journal makes this link explicit, stating that criminal charges against Tether could be bad news for Cantor Fitzgerald. That's their words. The industry is also no stranger to last-minute crackdowns. At the end of the Trump presidency, Treasury Secretary Steve Mnuchin, attempted to ram through rules that would ban self-hosted wallets. The Ripple lawsuit also came as one of the final actions from Jay Clayton before he resigned as SEC chair. The Biden administration has clearly had a far greater animus against the industry, and the opponents of crypto during this period have arguably been more organized in their approach. The speculation that I'm seeing in some places then is that this might be preparation for an 11th hour industry crackdown, particularly should Vice President Kamala Harris

Starting point is 00:03:26 lose the election. And if a crackdown did come to pass, it would put the industry in a difficult position. It was obvious and clear that the industry needed to come together to lobby against Mnuchin's last-minute wallet ban. It's a much greater task to snuff out of criminal investigation and sanctions. Also, if we're being honest, with the intensity of the battle for the stablecoin industry heating up, it's not totally clear that U.S.-based companies would rally to defend a rival. All of this, of course, places Bitcoin at a risk of a Black Swan event heading into the elections. Criminal charges against Heather would self-evidently be very, very bad for crypto-nated markets. Friday's early morning price action saw Bitcoin rallying hard, looking to make another run at the $69,000 level over the weekend.

Starting point is 00:04:05 Once the Wall Street Journal article was published, the market dove losing more than 4% throughout the day. The market recovered over the weekend, but the strong uptrend was at least temporarily broken. So what does Tether say about all this? Well, they are calling this the latest round of fud with no more relevance than prior reporting. They said, to suggest that Tether is somehow involved in aiding criminal actors or side-sepping sanctions is outrageous. It is wildly irresponsible for WSJ to write articles with reckless allegations with such certainty when no authorities have gone on the record to confirm these rumors and no sources are named. CEO Paulo Arduino took to Twitter to reemphasize their response, posting, as we told the Wall Street Journal, there is no indication that Tether is under investigation.

Starting point is 00:04:44 WSJ is regurgitating old noise, full stop. The reporting came out during the Plan B conference in Lugano, Switzerland, with Tether playing a central role. During his presentation, Arduino broke down Tether's reserves. He claimed the firm now holds $100 billion in U.S. treasuries, a further $5.5 billion in Bitcoin and 48 tons of gold. Addressing the article while on stage, Arduino said, As we told the Wall Street Journal, there is no indication that Tether is under investigation. We deal regularly and directly with law enforcement officials to help prevent rogue nations,

Starting point is 00:05:11 terrorists, and criminals from misusing USDT. We would know if we are being investigated as the article falsely claimed. Based on that, we can confirm that the allegations in the article are unequivocally false. But let's take a step back here. You just heard me make the argument that perhaps the reaction to this news stopped an uptrend, but you could easily argue that one of the notable things about this wave of fud is the lack of a major market reaction. A 4% daily move isn't nothing, but it's far from a catastrophe, especially given the weekend recovery. Jaded Capital noted that the plunge protection team of Bitcoin whales was in full effect, tweeting,

Starting point is 00:05:46 insane market when the reason we didn't gigapuke on tether and war was the Binance Whale simply saying not today, 1400 Bitcoin bid holding the line. Mercury tweeted, Tetherfut and warfud in the market doesn't care exactly what you want to say. C. Unip C's wrote, Tetherfud likely bottom signal, in my opinion, before aggressive up only. This happens literally every time before a big move. Clearly, the market then is discounting this fud to zero and doing so much faster than every other round of Tetherfud. As some have noted, though, that makes the risk of a Black Swan event even greater if it turns out to be something rather than a nothing burger. Economic historian J.B. Conning, in fact, thinks that this would be an extinction level event if it

Starting point is 00:06:21 actually came to pass, commenting, Tether being added to the sanctions list would be devastating, Given that Cantor Fitzgerald would have to block Tether's billions and Teebills, it's hard to imagine how the redemption mechanism would continue to function in the peg hold. Nick Carter thinks the game is pretty obvious, tweeting, Loads a Tetherfud. They're coming for Tether because Lutnik is a big Trump guy. It's a targeted leak from DOJ to WSJ aimed at hurting both Trump and the crypto space in general. Unbased tweeted,

Starting point is 00:06:46 notice how the TetherFud is released on a Friday? That's no coincidence. There are no redemptions over the weekend. Don't fall for recycled garbage. So clearly right now the market does not want to join the Tetherfell other truthers on this one. For almost a decade, the correct play has been to fade every single piece of tether fud. This report on the surface does seem categorically different, given that it's based on sources within the DOJ and Treasury. That again, it is a big, big caveat that there are

Starting point is 00:07:11 reasons that have nothing to do at all with crypto to say nothing of tether that are worth being more skeptical of. Overall, it is to me a really interesting little wrinkle in the crypto-slash-election story, and something that certainly, at least for now, I'll be keeping an eye on. This episode of The Breakdown is brought to you by XAT Network. As regular listeners know, one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and XAT Network is a great example of that. Exat Network utilizes a combined consensus mechanism of POW and POS, enabling miners to earn revenue and stakers to earn Bitcoin yield.

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Starting point is 00:08:46 A new note from JP Morgan suggests the super profits enjoyed by stablecoin issuers could be a difficult mode to defend as the assets become mainstream. They note that tokenized treasuries have exponentially grown over the past year, now hitting $2.4 billion in market cap. This is a fraction of the $180 billion stablecoin market, but the segment's rapid growth suggests that many stablecoin holders want to earn native yield without needing to use defy. BlackRock's Biddle Fund is the largest example of tokenized treasuries, and highlights one of the barriers to delivering yield-bearing stable coins to the market. The fund is covered by securities law, and as such, it can only be offered to accredited

Starting point is 00:09:16 investors under a regulatory exemption. Recent reports suggest that BlackRock is working with crypto exchanges to accept the token as a valid form of collateral. However, without full and permissive regulations in place, there's a limit to how many platforms would accept the token. Barriers to adoption in defy and crypto-native exchanges seem much lower, as the users and platform already take on a lot of regulatory risk. However, getting the tokens onto more mainstream venues would likely require a clear and solid regulatory framework for those issuing the tokens. J.P. Morgan suggests, tokenized treasuries would eventually replace only a fraction of the stablecoin universe unless regulations change dramatically in the future. Another issue they flagged is

Starting point is 00:09:50 liquidity. Basically, the only thing that matters for collateral is how fast it can be seized and liquidated during a period of market risk. Modern stablecoins are extremely good in this regard. They're able to be seized and redeemed for cash in the bank on a fairly reasonable time frame. Tokenized treasuries don't have anywhere close to the same liquidity profile and haven't really been tested during a major market event. JPMorgan writes, this liquidity disadvantage could potentially be lessened over time as tokenized treasuries gained further traction in the future, but a full replacement of stablecoin seems unlikely given tokenized treasury's regulatory disadvantage. Now, when it comes to stablecoin transactions, Coinbase Layer 2 Base has hit the top

Starting point is 00:10:23 of the charts for stablecoin transactions for the first time ever. Circle marketer Peter Schroeder wrote, on October 26, base processed $18.1 billion in stable coin transaction volume. 99.9% was in USC, accounting for over 30% of all stable coin transaction volume that day. That outranked all other chains, including Tron, which is currently processing around 17% of transactions. This month, USDC processed almost 50% more transactions than Tether, and the gap is widening. One of the interesting points buried in data from analytics firm Artemis is a clear weekly cycle to stable coin transactions. Volumes on both Tron and Ethereum may net collapse during the weekends, while Solana and

Starting point is 00:10:58 Base are far more steady. There are a number of possible explanations, but this could indicate that Ethereum and Tron are favored by professional traders that take the weekends off, while Solana and Base are used by retail traders. We also could be seeing the first signs of merchant adoption, particularly with Base, which is hooked up to Coinbase Commerce. Either way, something has definitely changed over the recent months. As recently as August,

Starting point is 00:11:18 base was seeing around $7 billion in daily transactions on average, meaning volume has doubled in the past two months. Anyways, friends, that is going to do it for today's breakdown. Lots of interesting things happening in the world of stablecoins. What do you think? Is this fud real, or is it just lawfare or something else entirely? Let me know, and in the meantime, be safe and take care of each other. Peace.

The Breakdown - Is the US Government Going After Tether?

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