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The End for U.S. Dollar Stablecoins? What’s in the U.S. Government’s Latest Crypto Power Grab

Last Updated December 4, 2023 2:37 PM
Josh Adams
Last Updated December 4, 2023 2:37 PM
Key Takeaways
  • A proposal from the U.S. Treasury last week lays out significant new rule changes.
  • It attempts to bring much of the global crypto industry into U.S. jurisdiction.
  • Included is an attempt to regulate all dollar-pegged stablecoins, regardless of location or clientele.

The U.S. Treasury Department unveiled a sweeping new proposal last week that would grant them unprecedented control over the global cryptocurrency industry – with potentially seismic impacts for international relations.

The plan originated from Deputy Treasury Secretary Wally Adeyemo, who presented it during remarks at a Washington D.C. blockchain policy summit on Wednesday 29 November.

An Unprecedented Attempt To Expand U.S. Jurisdiction

Adeyemo shard his concerns about stablecoins, including that foreign issuers “must establish robust procedures” to prevent misuse by “bad actors”, emphasizing they should not benefit from relying on the dollar without accountability.

Referencing a speech he gave last year, Adeyemo expressed disappointment at the industry’s perceived inaction on illicit finance – which he called a “clear national security risk.” He also referenced the recent $1 billion settlement agreement between Binance and U.S. authorities, claiming Binance had been used by terrorists, drug traffickers and child predators.

Adeyemo issued a stern warning that industry participants who intentionally ignore legal obligations or support services benefiting criminals will be found and held accountable.

While the Treasury plan covers various aspects of crypto regulation, its provisions related to stablecoins have provoked intense backlash. Stablecoins are digital assets pegged to real-world currencies, like Tether’s USDT that tracks the U.S. dollar. They are seen as crucial for unlocking mainstream crypto adoption.

Yet the proposal would let the Treasury’s Office of Foreign Assets Control (OFAC) exercise “extraterritorial jurisdiction” over any stablecoin relying on the dollar – even those with no ties to the U.S.

The U.S Treasury has outlined ambitious plans to regulate all U.S dollar-pegged stablecoins.
U.S Treasury proposals to regulate dollar-pegged stablecoins. Source: X/CampbellJAustin.

In a widely shared X post , crypto consultant Austin Campbell called this idea “completely insane,” predicting it would start a “trade war” by overriding other countries’ authority.

A Complete Crypto Overhaul

As well as new rules on dollar-pegged stablecoins, the U.S. Treasury’s proposal to the Senate Banking Committee also includes wider and significant changes in cryptocurrency regulation aimed at combating illicit finance. If implemented, it would mark a significant change in how the U.S treats digital assets and the infrastructure that supports them.

Key aspects include creating new fintech and cryptocurrency-specific sanctions, similar to existing banking sanctions, and redefining ‘financial institution’ under the Bank Secrecy Act to encompass various crypto-related entities. 

This expansion would subject exchanges, Virtual Asset Service Providers, and others to stringent anti-money laundering requirements. The proposal also seeks authority to designate specific blockchain nodes linked to criminal activities.

“There has to be a limit on ‘other elements’,” said  Campbell, referring to the plan’s vague language around targeting crypto transactions. “Treasury has the power to designate basically whatever on a blockchain is even adjacent to a transaction, which is wild.”

Additionally, it aims to clarify the jurisdiction of the International Emergency Economic Powers Act and the Bank Secrecy Act over foreign entities with U.S. touchpoints. The proposal, blending targeted and broad measures, has sparked furious debate over its potential impact on privacy, security, and global financial relations.

Crackdown Likely To Provoke Flight From Dollar Stablecoins 

Industry experts warn that asserting worldwide jurisdiction could undermine faith in America’s commitment to free markets and due process. It could also accelerate adoption of alternative reserve currencies like China’s e-CNY.

“Some parts of Treasury’s plan seem counter to U.S. interests,” said  Jerry Britto of the non-profit Coin Center in a statement.

Yet Adeyemo and his Treasury colleagues argue the lack of action around illicit crypto activity “represents a clear and present danger for national security.” There is significant debate around the extent to which criminals are successfully using crypto assets to evade sanctions and detection.

Many in crypto counter that heavy-handed regulations are not the best solution. They risk damaging U.S. economic competitiveness while failing to meaningfully address issues like terrorism financing. More targeted measures focused on exchanges and stablecoin issuers would be less disruptive.

If the measures end up in U.S. law, it is highly likely that U.S dollar-pegged stablecoins will fall out of popularity. In that event, stablecoin users could flee to a coin pegged to another large fiat currency like the Euro, Japanese Yen, or Pound Sterling.

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