If there’s any lesson crypto companies should have learned from this year so far — a mere eight months that have vaporized some $2 trillion in value — it’s that the world’s continued existence doesn’t depend on them being around. It wasn’t always this way, though. Last year, the U.S. Treasury issued a report on a specific subset of the crypto world known as stablecoins (which are supposed to stay at a fixed value, like $1) and the potential that its collapse could trigger a Lehman Brothers–type economic implosion. Such a report gave the impression that some of these companies, specifically the one that issued Tether, the world’s largest stablecoin, was essentially too big to fail. But since then, some of the biggest stablecoins, pseudo-banks, and hedge funds have collapsed under their own weight since April, and while it’s depressed this specific industry, that’s exactly zero percent of the reason the global economy has started to slow. (The U.S., which accounted for about a third of all crypto holdings, still continues to do just fine.)
So what’s happening right now between the Treasury and Tether is a little weird. For the past year, the federal department has been ramping up its regulation of cryptocurrencies and recently blacklisted a company called Tornado Cash that delves deep into financial crazy areas by anonymizing crypto transactions — a tool that was allegedly used by North Korean hackers to launder about $500 million in stolen cryptocurrency. Tether was not accused of doing anything wrong. However, since the Treasury has come down against the anonymizing service, Tether has gone ahead and continued to allow crypto wallets that are otherwise non grata to use the digital tokens.
Per the Washington Post:
One crypto company that has attracted scrutiny from U.S. regulators and law enforcement in the past, Tether, may be in violation of Treasury’s new rules. According to a Washington Post analysis of data from Dune Analytics, a crypto intelligence firm, Tether is not blacklisting accounts associated with Tornado Cash.
So far, the U.S. government has not taken action. “Tether has not been contacted by U.S. officials or law enforcement with a request” to freeze transactions with Tornado Cash, Tether’s chief technology officer, Paolo Ardoino, said in a statement, adding that the company “normally complies with requests from U.S. authorities.”
Chutzpah is the word that comes to mind. Sanctions are a tool of economic isolation, a way to crush a company or a country by starving it of financial resources. They are also public. Anyone with an internet connection can see what the sanctions are. To say, essentially, “Yeah, well, the government hasn’t specifically gone out of its way to tell us whether or not we can do this” is not the normal course of business when it comes to state sponsors of terrorism. North Korea has been a surprising blind spot for the crypto industry, with former Ethereum programmer Virgil Griffith going to prison after pleading guilty to helping the country evade sanctions.
What’s striking about this is how Tether’s response to all this — that the rules don’t apply — feels like a losing one after a long period in which it seemed as if crypto companies could do whatever they wanted. Lower in the story, Tether makes the argument that it’s really a Hong Kong company, so it doesn’t have to listen to what the Treasury says. But that’s not how it works, especially since Tether has previously submitted to U.S. regulation and even settled with New York’s attorney general over fraud. The reality is that if money flows through the U.S. financial system, the federal government pretty much gets to control it.
There are plenty of good arguments against sanctioning Tornado Cash and other anonymizing services, but these aren’t the arguments Tether is making. But whether Tether can really get away with doing this is a whole other question. Tether lost about a quarter of its holdings since its November peak, a run that led the digital currency to slip a little from its $1 value. (It has since regained its dollar peg). At the same time, money came rushing into its largest competitor, USD Coin, which does basically the same thing. In fact, there are all kinds of stablecoins out there that basically do the same thing, and the great big sloshing of money this year has shown that its “too big to fail” status is far from secure. The fact that it wants to throw its weight around now, and on North Korea of all things, is a hell of a way to test how systemically important it really is.