Kiffmeister’s #Fintech Daily Digest (05/14/2021)*

Binance Faces Probe by U.S. Money-Laundering and Tax Sleuths

Binance is reportedly under investigation by the US Justice Department and Internal Revenue Service, as part of efforts to root out illicit activity. As part of the inquiry, officials who probe money laundering and tax offenses have sought information from individuals with insight into Binance’s business.

Korea’s big blockchain Klaytn eyes CBDC, partners with ConsenSys

Korean public blockchain Klaytn has partnered with Ethereum developer ConsenSys to advance its central bank digital currency (CBDC) efforts. Klaytn was founded by Ground X, a subsidiary of Kakao, which operates Korea’s largest social network of over 50 million users. Last October, the Bank of Korea reportedly acknowledged it was discussing central bank digital won with Klaytn amongst other private players. KLAY is the native digital asset that fuels and secures the Klaytn protocol. With ConsenSys, Klayn is developing a private blockchain to enable the data protection that financial institutions demand. 

Tether says its reserves are  backed by cash to the tune of . . .  2.9%

Everyone’s writing about Tether’s fuzzy disclosure of the reserves backing its USDT stablecoin and today it’s FT Alphaville. I’m not going to rehash it here, but I thought I’d put out there two potential sources of guidelines for how they should be invested. First we could look at the investment limits put on US state-licensed money transmitters, and secondly about those imposed by the Federal Deposit Insurance Corporation (FDIC) guidelines for insured bank liquidity coverage ratios (LCRs):

  • Nearly every state money transmission law requires a licensee to at all times hold “permissible investments” at least equal to all money received for transmission by the licensee or its agents that has not yet been paid to the recipient or refunded to the sender. Along with cash and deposits at US-regulated deposit-taking institutions, only certain types of unencumbered securities qualify as permissible investments, including certificates of deposit and banker’s acceptances that are eligible for purchase by the Fed, and securities issued by agencies of the US government that are fully guaranteed by the United States. Also acceptable are commercial paper and corporate bonds issued by US-based corporations, and local government bonds, but they must all bear a credit rating of at least “A” (the third highest grade). 
  • US banks are subject to similar high-quality liquid asset (HQLA) criteria for the calculation of LCRs. Such HQLAs are divided into levels, with “Level 1” assets being included at full fair value, “Level 2A” assets at 85% and “Level 2B” assets at 50% of fair value. Level 1 assets are limited to cash, Reserve balances at the Fed and highly liquid securities issued by, or effectively unconditionally guaranteed by the US government or certain AAA-rated sovereign governments and international financial institutions. Level 2A assets include highly liquid marketable securities rated at least the equivalent of AA- issued issued by certain sovereigns, central banks, public sector entities or multilateral development banks, and unaffiliated corporations (including commercial paper and covered bonds). Level 2B assets includes certain highly-liquid investment-grade (rated at least the equivalent of BBB-) securities issued by unaffiliated corporate corporations, and municipal bonds, residential mortgage backed securities and exchange-traded common equity shares that are constituents of major stock indices. 

Until we get more granular reserves composition information from Tether, we can only guess at how compliant they are with either of these potential standards. For example, are corporate bonds and commercial paper rated at least the equivalent of “A” to meet the money transmitter requirements, or AA- to meet the FDIC ones? Mind you I was surprised to see how relaxed the money transmitter rules were about the market liquidity of marketable investments, whereas the FDIC has very stringent criteria. Also, the money transmitter regulations treat all eligible investments the same (the FDIC applies 15% and 50% haircuts to lower-rated securities). 

*For those interested in intra-day updates and news that didn’t make the Daily Digest cut, please check out my Diigo fintech bookmarks:

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