China Cracks Down: How Will Tether Adapt to Tighter Enforcement?

The People’s Bank of China (PBoC) office in Huizhou City announced Thursday, October 23rd, that three gambling sites were shut down and 77 individuals were arrested in connection with alleged money laundering.

The allegations involve the suspects taking advantage of Tether USDT, a cryptocurrency pegged to the US Dollar, in their attempts to “whitewash” or conceal the history of the funds in question, totalling around 120 million Yuan or nearly 18 million US Dollars. 

Recently Tether and other stablecoins have enjoyed a surge in popularity. They provide a means of stable value within the cryptocurrency market and hold great potential, in theory, for other uses like payments. However, case-in-point, stablecoins are still susceptible to misuse and continue to draw the concern of regulators. While wide adoption by enterprises is an important next step for Tether, organizations remain reluctant because of the legal and regulatory challenges they could face by doing so. 

Most enforcement of KYC and AML regulations on cryptocurrency today takes place within apps and services, not on blockchains. This means bad actors can evade the rules by simply choosing a different app or service. This poses risks to enterprises who would otherwise like to adopt Tether, and to Tether itself as governments tighten enforcement.

The solution is to enforce compliance on the blockchain. Most attempts at this have used centralized or private networks – more experimental blockchains where security isn’t industry-proven nearly as much as Bitcoin. Serious enterprises usually avoid adopting these because of liability risks and the potential for other parties to distrust the ledger. On the other hand, recent attempts with decentralized blockchains have provided very limited enforcement and sub-par service that cannot scale to demands. 

The good news: solutions are beginning to emerge. A prime example is seen in the recent compliance developments of Syscoin, a public decentralized token platform designed primarily to scale payments to global demand. Syscoin, which is permissionless and censorship-free by default, will offer Tether and other tokens the ability to “opt-in” to compliance on a scalable network. When Tether activates this, Syscoin’s blockchain network will ensure all USDT transactions meet requirements before they are notarized (or signed, in blockchain parlance) and settled. 

Syscoin’s compliance rules can use identity information, transaction history, and off-chain databases to check the legality of a pending transaction. Further, Tether will be able to apply specific rules based on country or economic zone, and update them to stay compliant with evolving regulations. These “Network-enforced Compliance Rulesets” are expected to make it easier for organizations to adopt stablecoins and blockchain tech. The Syscoin development team plans to deliver this with Syscoin Core version 4.2 which is expected Q1 2021.