Two of the biggest names in crypto had a public spat this week over whether stablecoin issuers should have to reveal to the general public what's in their reserves.
It's a hot-button issue in the stablecoin space, because reserves are the assets that issuers keep on hand to back one-to-one convertibility with the U.S. dollar. Without that convertibility, stablecoins can't serve the role of allowing people to buy and sell crypto without using dollars.
So what's actually in these reserves has become a big question among crypto investors. Are issuers buying safe, liquid assets, or are they engaging in more speculative investment?
The issue came to a head earlier this week as CoinDesk, the popular crypto news site, joined the legal battle between Tether, the world's largest stablecoin, and the New York attorney general.
At stake is whether or not Tether has the right to deny a Freedom of Information Law request from CoinDesk seeking details on Tether's reserves. The attorney general's office initially denied the request, but then CoinDesk won access on appeal. Now Tether is fighting that appeal.
CoinDesk maintains that Tether has become so central to the crypto economy, and by extension the rest of the economy, that investors have a right to know what's backing its stablecoins.
"With reportedly nearly 70 billion Tethers in circulation, the stablecoin plays an important role in the digital currency ecosystem, and some observers have worried that a loss in confidence in Tether could have an outsized effect on not just that ecosystem but also the traditional financial markets," CoinDesk wrote in a legal memorandum.
Tether fired back in a blog post that it was meeting all the requirements outlined in its agreement with the attorney general's office — which emerged from a separate case — and that anything beyond that would interfere with its right to withhold proprietary information.
"As a private company, Tether maintains certain proprietary details about its operations to protect its competitive advantage as a leader in the industry," the company said.
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The issue gets to the heart of why lawmakers and regulators are so wary of stablecoins. In the space of a few years, a handful of private companies have started minting billions of dollars in digital currencies that, in theory at least, are equal to cold, hard cash. The fact that stablecoins also happen to be propping up the unregulated crypto space only adds to their concerns.
Potential answers to this issue abound. A report from the President's Working Group on Financial Markets, released last November, recommended that stablecoin issuers be regulated as certified depository institutions, or banks, in other words.
This approach has gotten some buy-in from stablecoin issuers like Circle, which issues the second-largest stablecoin USDC, but others argue that stablecoin issuers are so different from banks that they deserve their own distinct set of regulations and regulators.
Meanwhile, other countries are trying to work out their own approach to the ballooning industry. Hong Kong's central bank, for example, released a paper on Wednesday outlining a plan to closely regulate everything from transactions to reserves.
Without clear regulations, stablecoin issuers are in the position of trying to anticipate what might be coming down the pike.
Most issuers now put out attestations of what's in their reserves. These are provided on a voluntary basis, and there are still no set standards for what exactly should be in these documents. But it does signal that issuers are at least trying to assuage investors' concerns.
Circle recently hired a company called Clearwater to better track its investment portfolio. This information wouldn't be provided to the public, but in theory, it could provide Circle with better data to inform more real-time public reports.
"They need to understand exposures, understand risks, then have the information to be able to disclose that information to third parties like the SEC," Scott Erickson, president of Americas and new markets at Clearwater, told Cheddar.
He said Circle's hiring of Clearwater signals that the company is being proactive about the pressures mounting for issuers to be more transparent.
"One thing that I believe Circle is doing is they recognize that federal regulations for digital currencies will only continue to increase. Even though there are no specified regulations yet, it behooves them and others to anticipate what those regulations will be and set up infrastructures today to be able to comply with those regulations and scale within those regulations."
Smaller digital currencies are also trying to get ahead of regulations by increasing transparency on their own.
The AXIA Coin, which touts itself as a "hyper-deflationary, asset-supported digital currency," plans to launch its own platform for reporting what's in its reserves this week.
The platform will provide details on the company's financial holdings, which will then be validated by third-party accredited auditors.
"There are currently a lot of questions being asked about the credibility of stablecoins and other forms of digital currency," said Nick Agar, the founder of AXIA. "Consumers and regulators alike want to know what's backing their financial claims."
AXIA said it sees the platform as a challenge to bigger players in the industry to maintain the same standard of transparency.