The pressure on stablecoin increases to redeem the original promise

appearing as stablecoins in the crypto world, they were advertised as an answer to the inherent volatility of many digital assets. Most stable coins are covered by hard assets such as a currency that anchor their value.

Obviously it didn't work out in some stable coins, since a very prominent token called Terrausd imploded in a spectacular way and another, Tether, has confronted with persistent questions about his asset protection.

You have to say that confidence in the sector is not high, with some critics even questioned whether there should be stable coins.

The crypto industry is now under the pressure of courts, supervisory authorities and legislators to show more transparently that it complies with the original promise of stable coins with solid asset protection.

Gary Gensler, the chairman of the Securities and Exchange Commission, repeated a claim this month that stable coins need more regulation, and said he would work with the congress to develop them. And in an immediate step, a New York court made a blow to the crypto industry giant Tether this week because he disclosed information about the reserves that support his own stable coin.

The Tether's USDOT token is often used in the markets for cryptocurrencies to trade Bitcoin and other important digital assets. It is the largest stable coin with a market value of around $ 70 billion. However, there have long been questions about the quality of securing assets. Instead of publishing a formal examination of his assets, Tether provides certificates about their value.

In 2021, both Tether and the Bitfinex sister crypto exchange paid a penalty of $ 18.5 million after the New York general prosecutor accused them of covering up "massive" financial losses. "Tether's claim that his virtual currency was completely covered by US dollars at all times was a lie," said Letitia James at the time. Tether and Bitfinex admitted "no misconduct".

The New York court judgment is heating up to the company again. In a lawsuit that was submitted to the US district court for the southern district of New York in June 2019, it is claimed that Tether and Bitfinex have exchanged incorrect information about Tether Stable Cooin and participated in market manipulation. Tether described the case as unfounded.

This week judge Katherine Polk Failla Tether and Bitfinex ordered information to be presented in accordance with the claims of the plaintiffs, and described these documents as “undoubtedly important because they relate to the support of tether and crypto raw material transactions”.

"A court has now weighed and said that you have to publish these documents to prove that they were supported as they said that they were. It is no longer a request that they have no choice," said Charley Cooper, Ceo of the Blockchain company R3.

Bitfinex refused to comment on the court ruling. Tether said the court ruling was a "routine investigative order and in no way underpinning the plaintiffs' unfounded claims". The company added that it had already agreed to present documents, "sufficient to determine the reserves to support USDT, and this dispute only concerned the scope of the documents to be submitted".

In August Tether said that it would focus on publishing certificates from quarterly to monthly and working with the auditing company BDO Italia. The company also said that this was the "next step on the company's path for a complete examination".

In the meantime, the decision of the court also falls at a time when Congress Member Patrick Mchenry (Rn.C.) and the Member of Congress Maxine Waters (D-CA), who acts as chair of the House Committee on Financial Services, negotiate on a draft stable.

According to a copy of the draft law, which was presented to the Financial Times, the supervisory authorities would examine the ability of an issuer to keep reserves for tokens on "at least one one-to-one basis" every application for operation in the USA. And reserves would have to include assets such as US currency, treasure change, pension business and reserve deposits of the central bank. Stable coins that are supported by code and algorithms-similar to the now notorious Terra Stable Cooin, which imploded-would be in the cold.

"This reflects the widespread view among supervisory authorities and legislators that there are too many risks in this sector and that one should not rely on the fact that the sector regulates itself," said Charlie Steele, former lawyer of the US government and now a partner at Forensic Risk Alliance, a regulatory consultation.

people who are familiar with the draft say that it is unlikely that the draft law will become the law this year, with a person proposing that this would require "force majeure". However, the draft is intended to provide information on how the 118th congress-which is to be chosen in November-approaches the StableCoin regulation.

"Instead of starting after the midterms, we are already somewhere in the game. It is serious in that it will serve as a framework for stable coins next year," says Cooper.

scott.chipolina@ft.com