New York regulators rocked cryptoland last week with the sudden yet unsurprising allegation that one of the world's leading cryptocurrency exchanges, BitFinex, had defrauded investors. The exchange—which has staunchly denied the charges contained in the New York Attorney General’s lawsuit—allegedly used its own "dollar-backed" stablecoin, Tether, to sweep $850 million in missing funds under the rug.

It's about as scandalous as it gets in crypto. And yet, the blowback could have far more wide-reaching effects, according to the Silicon-Valley based cryptocurrency intelligence firm CipherTrace.

“Tether may set off a domino effect of regulators demanding more transparency for fiat or asset-backed coins,” a CipherTrace spokesperson tells Decrypt.

CipherTrace notes that there are more than 20 “unregulated” fiat or asset-backed coins in the market today. In fact, the blockchain forensics company says that the Gemini dollar and Paxos are the only two stablecoins that are “backed 1:1 with US dollars and licensed under the [Bank Secrecy Act] and the rigorous New York State Department of Financial Services (NYDFS) BitLicense regulation.”

Every other stablecoin out there, according to CipherTrace, could potentially be used to manipulate the market and defraud unsuspecting investors. What’s more, the crypto intelligence firm is particularly concerned by the risk posed by “privacy stablecoins”—decentralized stablecoins, such as MakerDAO’s Dai, that aren’t backed by fiat or a hard asset, like gold, or real estate.

“Privacy stable coins are inherently manipulated, can mask many things and could cover up shortfalls,” CipherTrace CEO Dave Jevans tells Decrypt. “Privacy stable coins are linked to other underlying synthetic securities, such as related stocks and bonds, that are investments that rise and fall to stabilize the stablecoins. They also mint and burn the related securities to manipulate the price of the stable instrument to stabilize it,” he says.

“Without regulation, audits and insurance, holders of the currency must rely on faith and not expect full disclosure,” says Jevans, regardless of whether the coin is asset-backed or not. Absent that type of disclosure, “market makers can change the terms and conditions at will.”

“In Tether’s case,” he says, “they decided it was OK to back it with debt instead of fiat currency and issued a line of credit to Bitfinex for $625 million in November and didn’t disclose [it] until March 27.”

While Tether is purportedly fully backed by U.S. dollars, according to iFinex Inc—the company that operates both BitFinex and Tether—the stablecoin issuer has yet to produce a conclusive audit that puts lingering doubts about its solvency to rest.

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The lawsuit filed against iFinex last week by the New York State Attorney General further fueled those concerns, compounding the controversy that already surrounded BitFinex and Tether’s incestuous relationship. Among the allegations, the attorney general’s office claims BitFinex and Tether “engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds,” according to its press release.

The New York AG further alleged that the money was “handed over, without any written contract or assurance,” to a Panama-based “bank” called Crypto Capital. BitFinex, in its defense, released a statement which claims that “these Crypto Capital amounts are not lost but have been, in fact, seized and safeguarded.”

In either case, it’s precisely this sort of lack of both transparency and regard for market participants that CipherTrace claims will force regulators to act.

In its Q1 2019 Cryptocurrency Anti-Money Laundering Report provided to Decrypt, the intelligence firm notes that regulators around the world “are rethinking controls on the internal business practices and security operations of exchanges.” Considering the “huge losses suffered by users of QuadrigaCX,” and now BitFinex—both of which, perhaps not coincidentally, clients of Crypto Capital—the fallout could be considerable.

“A tsunami of tough new global anti-money laundering (AML) and counter-terror financing (CTF) regulations will roll over the crypto landscape in the coming year,” the company says in its report.

Regulations alone, though, won’t be enough, says Jevans: “Regulation is a start, but without a requirement to audit, [it’s] like posting a speed limit and not enforcing it.”

Juan Llanos, a cryptocurrency compliance expert and advisor to several FinTech startups, shares a similar view though suggests that isn’t necessary regulations themselves that need to be strengthened globally, but rather their enforcement.

“In my opinion, shared by others who also have deep knowledge of payments regulation, stablecoins are nothing more than stored value or, as defined in the most recent U.S. regulations, ‘prepaid access,’” he says. “This type of business activity is already regulated. Prepaid access providers, sometimes subsumed under the money transmitter category, are subject to licensing in many jurisdictions in the U.S. and elsewhere.”

In other words, there’s no need for a federal mandate that replicates New York’s BitLicense regime across the United States, since these projects must already conform to the rules that govern all Money Service Businesses (MSBs). Licensed money transmitters or “stored value providers” are currently required to meet certain consumer-protection obligations, says Llanos, such as “mandatory transparency on financial condition, permissible investments (assets in which the licensee is authorized to store the value), and outstanding obligations (value at risk).”

Llanos says there isn’t anything new or special about stablecoins, other than the fact that the stored value is being digitally represented as a token. The laws that oversee traditional providers of prepaid access apply just the same.

CipherTrace, on the other hand, insists that decentralized stablecoins present a unique threat to consumers. The company recommends that regulators consider restricting or even outright banning “privacy coins that masquerade as crypto-backed and algorithm-backed stablecoins.” Beyond the potential for market manipulation, the firm says these coins are ripe for unlawful use—enabling the concealment of criminal activity and even terrorist financing.

“They are potentially a conduit for several types of financial crime,” Llanos concedes. But, then again, many other “financial services and technologies are too,” he says.