WASHINGTON, DC – Last year, Congress passed the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act to place the government’s stamp of approval on “stablecoins,” digital assets designed to maintain a stable value of $1. For every stablecoin in circulation, the company issuing the stablecoin must maintain an equivalent amount of real dollars or liquid assets in a reserve fund to meet investors’ requests to get their money back upon demand.

But due to a major loophole in the GENIUS Act, foreign stablecoin giants like Tether -- which is headquartered in El Salvador and handles about 60 percent of the more than $300 billion stablecoin market -- can operate without the fundamental verification requirement. If Tether were to fail it could have ripple effects extending into traditional financial systems and collapse crypto markets, costing U.S. consumers billions of dollars.

U.S. Senator Jack Reed (D-RI), a member of the Senate Banking Committee, introduced the Foreign Stablecoin Transparency Act (S.3907) to prevent foreign stablecoin companies from escaping audits and potentially putting American consumers and the U.S. economy at risk.

For years Tether has claimed it would submit to a formal audit but has never followed through. At a recent Senate Appropriations Subcommittee hearing with U.S. Secretary of Commerce Howard Lutnick, Reed was able to get Secretary Lutnick to agree: “I absolutely agree with you, Tether should be audited.”

Before becoming Commerce Secretary, Lutnick founded and ran the investment bank Cantor Fitzgerald which is now run by his adult children and has maintained significant business ties with Tether, including acting as the custodian of its assets and owning a 5 percent stake in Tether worth an estimated $600 million. At the 2024 World Economic Forum at Davos, when Lutnick was still chairman and CEO of Cantor, he noted that he had seen Tether’s books and maintained a close relationship with Tether, saying: “I manage many, many of their assets…” and “From what we’ve seen, and we did a lot of work, they have the money.”

Launched in 2014, Tether is the world’s largest stablecoin company. The secretive crypto giant issues the world's largest stablecoin called USDT and reportedly has over $187 billion worth of digital tokens in circulation and dominates the global market for dollar-pegged digital assets. USDT can be freely offered, sold, and used by Americans even though the GENIUS Act does not require Tether to provide a full accounting of the reserves backing Tether’s stablecoin.

“Right now foreign stablecoin issuers are able to operate on little more than a pinky promise. If foreign stablecoin issuers want the privilege of creating and handling the American people’s money, then they should open up their books for the American people to see,” said Senator Reed. “My bill sets up the same expectations for foreign stablecoin issuers that apply to large U.S. stablecoin companies, banks, and other payments companies.”

Senator Reed’s bill would require foreign stablecoins backed by the U.S. dollar to undergo an audit, no matter where the company is located. Reed’s proposal mirrors amendments he proposed during the Senate Banking Committee’s markup of the GENIUS Act that were defeated by Senate Republicans.

Unless stablecoin issuers are audited, there is no independent verification that the company has enough assets to cover all stablecoins in circulation. Instead, holders must take the word of the issuer. If the issuer does not have sufficient reserves or is found to be cooking the books, then a stablecoin company may experience a “run” on its assets and holders will not be able to get their money back despite being sold something that they are told is safe and redeemable on demand.

All kinds of companies that handle the American people’s money must undergo financial statement audits. U.S.-based dollar stablecoin issuers with $50 billion of stablecoins in circulation must get an audit. Banks of all sizes must get audits, even the smallest community banks. Many states require licensed money transmitters to submit audited financial statements to provide transparency and verify their financial health. Even private unregistered funds that are sponsored by U.S. investment advisers must get audits and all public companies must get audits.

Reed noted that Tether is not the only foreign stablecoin issuer, but given’s Tether’s size and growing footprint it is an urgent matter that must be addressed by Congress. Reed also said there are other loopholes in the GENIUS Act that must also be plugged because the current law fails to protect victims of fraud and doesn’t provide sufficient oversight to prevent crypto companies from profiting from fraud.

“Tether needs to be transparent and it shouldn’t be allowed to profit from fueling crime and corruption,” said Reed. “Right now foreign stablecoin issuers are operating without enough oversight. And as they continue to grow, the potential for an economic catastrophe grows right along with them unless they are properly regulated.”

Tether’s USDT tokens have been identified as helping terrorists and criminals move money and fund international crime and financial fraud. According to the Wall Street Journal, Tether is “the shadow dollar that’s fueling the financial underworld . . . enabling a parallel economy that operates beyond the reach of U.S. law enforcement.” The Treasury Department’s 2024 National Terrorist Financing Risk Assessment notes that “ISIS and other terrorist groups have moved towards using stablecoins, including Tether, to move or store funds.” According to Chainalysis: “stablecoins are now occupying the majority of all illicit transaction volume (63% of illicit transactions)” and “sanctioned entities . . . have a greater incentive to use stablecoins due to challenges otherwise accessing the U.S. dollar through traditional means.”