Stablecoins

Tether says it would not freeze sanctioned Tornado Cash addresses unless instructed by law enforcement

“In our dealings with law enforcement we are sometimes specifically instructed not to freeze addresses as this could alert suspects,” says Tether.

On Wednesday, U.S. dollar stablecoin issuer Tether (USDT) said that it would not freeze smart contract addresses sanctioned by the U.S. Office of Foreign Assets (OFAC) Control’s Specially Designated Nationals and Blocked Persons (SDN) list for cryptocurrency trail-mixer Tornado Cash. In explaining the decision, Tether said: 

“So far, OFAC has not indicated that a stablecoin issuer is expected to freeze secondary market addresses that are published on OFAC’s SDN List or that are operated by persons and entities that have been sanctioned by OFAC. Further, no U.S. law enforcement agency or regulator has made such a request despite our near-daily contact with U.S. law enforcement whose requests always provide precise details.”

Tether pointed out that unilaterally freezing wallet or smart contract addresses could be a “highly disruptive” and “reckless” move. “It could alert suspects of an impending law enforcement investigation, cause liquidations or abandonment of funds and jeopardize further evidence gathering,” the issuer said.

All U.S. persons and entities are prohibited from interacting with the digital currency mixer’s USDC and Ethereum smart contract addresses on the SDN list, subject to stiff criminal penalties for violation. However, Tether is a Hong Kong-based issuer and neither onboards U.S. persons as customers nor conducts business in the United States, although it voluntarily follows certain U.S. regulations as a part of compliance.

Tether also expressed reservations regarding USD Coin issuer Circle’s decision to unilaterally freeze Tornado Cash smart contract addresses earlier this month. “If made without instructions from U.S. authorities, the move by USDC to blacklist Tornado Cash smart contracts was premature and might have jeopardized the work of other regulators and law enforcement agencies around the world,” says Tether. The firm points out that other stablecoin issuers based in the U.S., such as Paxos and Dai, did not freeze any Tornado Cash wallets. The sanctions went into effect on August 8. 

Tether says it won’t freeze sanctioned Tornado Cash addresses unless instructed by law enforcement

“We are sometimes made aware of addresses potentially related to crime and are specifically instructed not to freeze the addresses without the explicit request from law enforcement,” says Tether.

On Wednesday, U.S. dollar stablecoin issuer Tether said that it would not freeze smart contract addresses sanctioned by the United States Office of Foreign Assets (OFAC) Control’s Specially Designated Nationals and Blocked Persons (SDN) list for cryptocurrency trail-mixer Tornado Cash. In explaining the decision, Tether said: 

”So far, OFAC has not indicated that a stablecoin issuer is expected to freeze secondary market addresses that are published on OFAC’s SDN List or that are operated by persons and entities that have been sanctioned by OFAC. Further, no U.S. law enforcement agency or regulator has made such a request despite our near-daily contact with U.S. law enforcement whose requests always provide precise details.”

“Tether pointed out that unilaterally freezing wallet or smart contract addresses could be a “highly disruptive” and “reckless” move. “It could alert suspects of an impending law enforcement investigation, cause liquidations or abandonment of funds and jeopardize further evidence gathering,” the issuer said.

All U.S. persons and entities are prohibited from interacting with the digital currency mixer’s USDC and Ethereum smart contract addresses on the SDN list, subject to stiff criminal penalties for violation. However, Tether is a Hong Kong-based issuer and neither onboards U.S. persons as customers nor conducts business in the United States, although it voluntarily follows certain U.S. regulations as a part of compliance.

Tether also expressed reservations regarding USD Coin issuer Circle’s decision to unilaterally freeze Tornado Cash smart contract addresses earlier this month. “If made without instructions from U.S. authorities, the move by USDC to blacklist Tornado Cash smart contracts was premature and might have jeopardized the work of other regulators and law enforcement agencies around the world,” says Tether. The firm points out that other stablecoin issuers based in the U.S., such as Paxos and Dai, did not freeze any Tornado Cash wallets. The sanctions went into effect on Aug. 8. 

United Texas Bank CEO wants to ‘limit the issuance of US dollar-backed stablecoins to banks’

Scott Beck, the CEO of United Texas Bank, claimed that stablecoin issuers like Circle were “effectively sucking deposits out of the banking industry.”

Scott Beck, chief executive officer of United Texas Bank, called on members of the state’s blockchain working group to recommend policy for leaving stablecoins to banks rather than crypto firms.

Speaking before the Texas Work Group on Blockchain Matters in Austin on Friday, Beck suggested limiting the issuance of U.S. dollar-backed stablecoins to licensed banks rather than issuers like Circle. The United Texas Bank CEO cited a November report from the President’s Working Group on Financial Markets, in which the group said stablecoin issuers should be held to the same standards as insured depository institutions including state and federally chartered banks.

“If such stablecoins are defined to be ‘money’, banks are the proper economic actor to issue and manage stablecoins,” said Beck. “Banks have the expertise and legal framework for handling money, and unlike today’s stablecoin actors, banks are highly regulated at both the state and federal level.”

He added:

“Bringing stablecoin activities into the banking sector and prohibiting non-banks from issuing stablecoins will enhance consumer protection and attract additional resources and capital to this emerging area of economic activity.”

United Texas Bank CEO speaking before the Work Group on Blockchain Matters at the Texas Capitol on Friday

In response to questioning from working group member and MoneyGram general counsel Robert Villaseñor, Beck claimed that stablecoin issuers like Circle were holding assets at “other institutions” in contrast to banks, “effectively sucking deposits out of the banking industry.” He added that some stablecoins were particularly vulnerable to runs, potentially threatening the economy should the market reach a certain size, and leaving the issuance to banks ensured Know Your Customer rules would be followed.

Lee Bratcher, president of the Texas Blockchain Council and in attendance at the hearing, challenged Beck’s proposal as “anti-competitive.” The bank CEO countered that one of the key differences between licensed banks and private companies issuing stablecoins was that for the former, the cash behind the tokens would remain “sitting at the Fed,” also ensuring the funds would be FDIC insured.

Related: Is Austin the next US crypto hub? Officials approve blockchain resolutions

Circle’s USDC dollar-pegged stablecoin is supposedly 100% backed by cash or cash equivalents, including bank deposits, Treasury bills, or commercial paper. The stablecoin issuer announced in March that financial institution BNY Mellon would be responsible for custodying its USDC reserves — more than 52 billion coins are in circulation as of the time of publication.

The Texas Work Group on Blockchain Matters was officially formed in September 2021 following the passage of House Bill 1576. According to the group’s website, its mission includes developing a framework “for the expansion of the blockchain industry in Texas and recommend policies and state investments in connection with blockchain technology.”

MakerDAO should ‘seriously consider’ depegging DAI from USD: Founder

In light of the recent Tornado Cash and frozen USDC addresses debacle, MakerDAO founder Rune Christensen is hoping to move DAI’s collateralization away from USDC.

MakerDAO founder Rune Chirstensen has urged members of the decentralized autonomous organization (DAO) to “seriously consider” preparing for the depeg of its DAI stablecoin from the United States dollar (USD).

The founder’s comments came in light of the recently announced sanctions on crypto mixer Tornado Cash, noting to MakerDAO’s Discord channel on Aug. 11 that the sanctions are “unfortunately more serious than I first thought,” adding that they should prepare to depeg its native stablecoin DAI from the USD to avoid any risk’s relating to Circle’s recent freezing of sanctioned USD Coin (USDC) addresses.

“I think we should seriously consider preparing to depeg from USD. It is almost inevitable it will happen and it is only realistic to do with huge amounts of preparation.”

On Aug. 8, the U.S. Office of Foreign Asset Control (OFAC) officially barred residents from using the Tornado Cash protocol, while placing 44 USDC addresses linked with the platform on its list of Specially Designated Nationals.

Following the move, USDC issuers Circle froze $75,000 worth of the stablecoin linked to the 44 sanctioned addresses.

Around 50.1% of MakerDAO’s DAI is collateralized by USDC (according to Dai Stats) Christensen has raised concerns over the asset’s heavy reliance on a centralized asset in USDC, as Circle has shown that it will act in accordance with United States law in the case of Tornado Cash.

DAI is currently the fourth largest USD-pegged stablecoin in crypto with its current market cap of $7 billion, and the figure places it as the fifteen largest asset overall.

Ditching USDC backing

Following the call, Yearn.finance core developer @bantg suggested that MakerDAO was considering converting all its USDC from its peg stability module into $3.5 billion in ETH, which would result in more than 50% of DAI being backed by Ether (ETH), a massive jump from the 7.3% currently.

Related: DeFi platform Oasis to block wallet addresses deemed at-risk

The proposed idea drew criticism from the community, comparing MakerDAO to the beleaguered Terra (LUNA) project, which aggressively bought Bitcoin (BTC) to back its Terra USD stablecoin before the project ultimately imploded.

Ethereum co-founder Vitalik Buterin also chimed in, stating:

“Errr this seems like a risky and terrible idea. If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.”

However, Christensen later clarified that what he actually “wrote in the maker governance discord was that yoloing all the stablecoin collateral into ETH would be a bad idea.”

Though he confirmed that a “partial yolo” could still be a good idea, noting:

“I think slowly DCA’ing some collateral into ETH is an option that can be considered depending on the severity of the blacklisting risk, which I personally think is much higher after the TC blacklist… it would exchange blacklist risk for depeg and haircut risk.”

MakerDAO should ‘seriously consider’ depegging DAI from USD — Founder

In light of the recent Tornado Cash and frozen USDC addresses debacle, MakerDAO founder Rune Christensen is hoping to move DAI’s collateralization away from USDC.

MakerDAO founder Rune Christensen has urged members of the decentralized autonomous organization (DAO) to “seriously consider” preparing for the depeg of its Dai (DAI) stablecoin from the United States dollar.

The founder’s comments came in light of the recently announced sanctions on crypto mixer Tornado Cash, noting to MakerDAO’s Discord channel on Thursday that the sanctions are “unfortunately more serious than I first thought,” adding that they should prepare to depeg its native stablecoin DAI from the USD to avoid any risk’s, relating to Circle’s recent freezing of sanctioned USD Coin (USDC) addresses:

“I think we should seriously consider preparing to depeg from USD. It is almost inevitable it will happen and it is only realistic to do with huge amounts of preparation.”

On Monday, the U.S. Office of Foreign Asset Control (OFAC) officially barred residents from using the Tornado Cash protocol, while placing 44 USDC addresses linked with the platform on its list of Specially Designated Nationals.

Following the move, USDC issuers Circle froze $75,000 worth of the stablecoin linked to the 44 sanctioned addresses.

Around 50.1% of MakerDAO’s DAI is collateralized by USDC, according to Dai Stats. Christensen has raised concerns over the asset’s heavy reliance on a centralized asset in USDC, as Circle has shown that it will act in accordance with United States law in the case of Tornado Cash.

DAI is currently the fourth largest USD-pegged stablecoin in crypto with its current market cap of $7 billion, and the figure places it as the fifteen largest asset overall.

Ditching USDC backing

Following the call, Yearn.finance core developer bantg suggested that MakerDAO was considering converting all its USDC from its peg stability module into $3.5 billion in Ether (ETH), which would result in more than 50% of DAI being backed by ETH, a massive jump from the 7.3% currently.

Related: DeFi platform Oasis to block wallet addresses deemed at-risk

The proposed idea drew criticism from the community, comparing MakerDAO to the beleaguered Terra project, which aggressively bought Bitcoin (BTC) to back its TerraUSD Classic (USTC) stablecoin before the project ultimately imploded.

Ethereum co-founder Vitalik Buterin also chimed ind, stating:

“Errr this seems like a risky and terrible idea. If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.”

However, Christensen later clarified that what he actually “wrote in the maker governance discord was that yoloing all the stablecoin collateral into ETH would be a bad idea.”

Though he confirmed that a “partial yolo” could still be a good idea, noting:

“I think slowly DCA’ing some collateral into ETH is an option that can be considered depending on the severity of the blacklisting risk, which I personally think is much higher after the TC blacklist… it would exchange blacklist risk for depeg and haircut risk.”

Circle plans to only support Ethereum PoS chain after Merge is complete

“USDC as an Ethereum asset can only exist as a single valid ‘version,‘” said the team at Circle.

On Tuesday, Circle, the issuer of the USD Coin (USDC) stablecoin, pledged its full support for the transition of Ethereum to a proof-of-stake, or PoS, blockchain after the much-anticipated Merge upgrade. The firm views the Merge as an important milestone in the scaling of the Ethereum ecosystem, writing:

“USDC has become a core building block for Ethereum DeFi innovation. It has facilitated the adoption of L2 solutions and helped broaden the set of use cases that today rely on Ethereum’s vast suite of capabilities. We understand the responsibility we have for the Ethereum ecosystem and businesses, developers and end users that depend on USDC, and we intend to do the right thing.”

Currently, USDC is both the largest dollar-backed stablecoin issued on Ethereum and the largest ERC-20 asset overall, with over $45 billion in market capitalization residing in the ecosystem at the time of publication. Its reserves are audited and held at U.S. financial institutions such as BlackRock. 

Unlike others, Circle continued that it doesn’t expect any issues as the Ethereum blockchain begins its transition, stating:

“We do not anticipate disruptions to USDC on-chain capabilities nor to our fully automated issuance and redemption services. Circle’s testing environment is connected to the Goerli Ethereum testnet, and we will monitor closely as it merges with Prater in the coming days.”

The company is following suit alongside an increasing number of firms that vouch to transition to Ethereum’s PoS blockchain upon completing the Merge. The day prior, Chainlink said it would not support any proof-of-work forks after the upgrade. Due to the proximity of the upgrade, Ethereum layer-2 solution Optimism has seen its token skyrocket by over 300% due to Merge speculation. 

Tether supply starts to increase after three-month decline

The Tether printers have been fired up again as the USDT circulating supply has started to tick up.

The world’s largest stablecoin, Tether (USDT), has expanded its circulating supply following almost three months of reductions, in what could be a sign the crypto markets are slowly recovering. 

The first mint in almost three months occurred on Friday, and there have been three more, with the latest on Tuesday, according to CoinMarketCap. The USDT injections have been small, however, lifting Tether’s market cap by just 0.7% or just under $500 million.

USDT market cap 7D – Coinmarketcap.com

According to the Tether transparency report, there is now 66.3 billion USDT in circulation. This gives the stablecoin a total market share of around 43%.

Tether supply reached an all-time high in early May when it topped 83 billion USDT. The collapse of the Terra ecosystem, resultant crypto contagion and large-scale redemptions forced the company to reduce the circulating supply, which fell 21% to a low of 65.8 billion in late July.

This has enabled rival company Circle to increase the market share of its stablecoin USD Coin (USDC), which now commands a 36% slice with a $54.5 billion market cap. As reported by Cointelegraph last month, USDC volume on Ethereum actually flipped Tether’s for a period of time as the number two stablecoin continues to catch up.

Over the weekend, Binance CEO Changpeng Zhao commented on the number of stablecoins poised to re-enter the markets, stating:

“3 of the top 10 are stablecoins, meaning there is a lot of ‘fiat’ sitting sidelines, ready to get back in. If people wanted to get out of crypto, most won’t hold stablecoins.”

Stablecoins currently represent 13.6% of the entire crypto market capitalization, which is close to its all-time highest levels.

Related: Circle’s USDC on track to topple Tether USDT as the top stablecoin in 2022

A cost of living crisis caused by surging global inflation may have put the brakes on crypto investing and speculation for retail traders. However, those living in countries with extreme inflation levels such as Argentina have held onto United States dollar-pegged stablecoins as a hedge against their own currencies.

Tether acknowledged the benefits of holding stablecoins, stating that USDT “allows Argentinians to access a market that is truly global and liberates them from local black markets,” adding that it also “empowers them to hold Tether in ways that cannot be confiscated by the government, unlike local bank accounts.”

Solana-based stablecoin NIRV drops 85% following $3.5M exploit

The $3.5 million flash loan attack Solana-based Nirvana Finance saw the price of its stablecoin NIRV and native token ANA fall around 85% apiece.

Solana-based algorithmic stablecoin NIRV has become the latest stablecoin to fail after dropping 85% from its United States dollar peg following a hack on adaptive yield protocol Nirvana Finance on Wednesday.

The flash loan attack, which also saw Nirvana Finance’s native token ANA drop by 85%, resulted in the loss of $3.49 million worth of Tether (USDT), with the SolanaFM team being the first to confirm that the funds were siphoned via a flash loan attack on Wednesday:

“Utilizing Solend Protocol’s Flash Loans, the hacker borrowed $10M USDC from the Solend Main Pool Vault which was used to exploit $3.49M USDT from the Nirvana Finance Treasury.”

At the time of writing, both NIRV and ANA are down roughly 85% to $0.14 and $1.33, respectively, at the time of writing. On Nirvana’s website, it confirms that the protocol was “maliciously hacked and reserve funds are stolen. NIRV and ANA have lost their collateral, and do not have secured market value.”

The Nirvana team is now offering the hacker a whitehat bounty of $300,000 and a “cessation” of the investigation into their identity. So far, they revealed that the hacker’s wallet tied to a centralized exchange has been flagged.

“Please accept this good faith request and return our treasury for the good of the whole Nirvana community. You have not taken money from VCs or large funds—the treasury you have taken represents the collective hopes of everyday people,” it wrote. 

Another algo bites the dust

The algorithmically collateralized NIRV is unironically described by the protocol as a “superstable” token. According to an explanatory thread on Solana Forums, the asset is backed by a network of stablecoins in Nirvana’s reserves via a “decentralized peg delegation.”

“NIRV is always treated as $1 from the protocol’s point-of-view. This dollar value is denominated in ANA tokens. For instance, if the spot price of ANA is $12, the protocol accepts 12 NIRV to purchase an ANA token.”

In this instance, it appears that NIRV was depegged as a direct result of $3.49 million worth of USDT being stolen from Nirvana’s coffers. It marks yet another algo-stablecoin that has been severely depegged in 2022. Beanstalk Farm’s algorithmic stablecoin is sitting at $0.0022 after the protocol was hacked for $182 million in April.

Terra’s first variation of its algo-stablecoin TerraUSD Classic (USTC) also famously imploded following a death spiral that resulted in $40 billion being wiped from the market in May.

How it worked

According to blockchain audit platform OtterSec, a hacker used a program to artificially pump the price of ANA from $8 to $24 via the flash loan. They were then able to mint ANA against the flash loan at the inflated price and subsequently exchanged the asset for $3.49 million worth of USDT which was drained directly from Nirvana’s treasury.

OtterSec noted that his hack shared similarities with the attack on Crema Finance worth $10 million earlier this month, in which the attacker took out a flash loan from the Solend decentralized finance (DeFi) protocol to inflate pricing data and raid the protocol.

SolanaFM also noted that the hacker exited the attack by converting “the full USDT amount into USDCet, transferring the funds into an Ether (ETH) account” via Wormhole’s cross-chain bridge.

Circle CSO lays out policy principles for stablecoins in US

Dante Disparte hinted the U.S. could take a leading role in stablecoin regulation in an effort to “avoid trans-Atlantic or global misalignment.”

Dante Disparte, Circle’s chief strategy officer and head of global policy, who has previously testified at congressional hearings, has called on United States lawmakers to balance the risks with developing a regulatory path for stablecoins.

In a Monday blog post, Disparte named 18 principles Circle had established as part of its effort to shape stablecoin policy in the United States. Circle, the company behind USD Coin (USDC) with a reported $54 billion in circulation, highlighted privacy concerns, “a level playing field” between banks and non-banks over a U.S. dollar-pegged digital currency, how stablecoins can coexist alongside a central bank digital currency and the need for regulatory clarity.

“Harmonizing national regulatory and policy frameworks for dollar digital currencies advances U.S. economic competitiveness, job creation and payment system optionality, while averting a harmful domestic ‘fintech constitutional crisis,’ and global regulatory arbitrage,” said Disparte.

The Circle CSO cited the European Union in June passing the Markets in Crypto-Assets Framework, or MiCA — legislation aimed at harmonizing regulations for crypto among EU member states. Disparte added that the U.S. could take a leading role in an effort to “avoid trans-Atlantic or global misalignment” on stablecoin regulation.

In the United States, the President’s Working Group on Financial Markets issued a report in November on stablecoin regulation in the country. The policy recommendations include having stablecoin issuers subject to “appropriate federal oversight” under Congress’ purview, as the digital asset could grow to a point it would fall “outside of the regulatory perimeter” of the Securities and Exchange Commission and Commodity Futures Trading Commission.

Related: Cryptopedia: Learn the concepts behind stablecoins and how they work

Disparte was part of Facebook’s Libra stablecoin venture — later renamed Diem — before leaving for Circle in April 2021. Circle CEO Jeremy Allaire has also previously testified at congressional hearings on the digital asset space, addressing the House Committee on Financial Services in December 2021 and a Senate hearing in 2019.