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Tether custodian and Trump Cabinet pick Howard Lutnick has told US lawmakers that illicit use of stablecoins can be "eliminated" by using AI tools to "rip through" the blockchain.

On Wednesday (January 29), Lutnick appeared before a US Senate committee for his , following his nomination as commerce secretary by President Trump.

Lutnick’s role as chair and CEO of Cantor Fitzgerald, the firm that custodies Tether’s US Treasury bills, was a key theme during the hearing.

Senator Maria Cantwell (D-WA) took the lead in questioning Lutnick over his potential conflicts of interest and Tether’s role in crypto-based money laundering.

She cited figures from blockchain analytics firm , which in 2023 found that Tether’s stablecoin, USDT, had been used in more than $19bn of illicit transactions.

When asked what his solution to this problem would be, Lutnick initially deflected to illicit use of regular US dollars, and played down Tether’s culpability.

“The number one instrument of the criminals of the world is the US dollar, and the number two is the euro,” he said.

“Tether is the largest stablecoin, so criminals use it more than Circle, which is the second largest.

“It's like blaming Apple because criminals use Apple phones — it's just a product.”

Nonetheless, Lutnick told Cantwell that Tether has — on his instruction — “signed up” with all US law enforcement agencies, and follows requests received from these agencies “instantly”.

Cantwell responded that although working closely with agencies is a positive step, Tether could do more to prevent illicit use of its stablecoin prior to interventions by the FBI or Department of Justice (DOJ).

For example, Tether is subject to know your customer (KYC) and anti-money laundering (AML) requirements, but the extent of the illicit usage of its stablecoin would indicate that these controls are easily skirted.

“In my due diligence and Cantor’s due diligence, Tether did no business with anyone who wasn't KYC-appropriate,” said Lutnick.

“At some point, their product was bought by someone and used inappropriately — it’s entirely on the secondary market.”

When asked whether future stablecoin regulations ought to address secondary market trading, Lutnick proposed a technology-based solution instead.

“I think AI tools used by the US government running through the blockchain of stablecoin issuers will rid the world of criminals using blockchain for illicit activity,” he said.

“Our ability to oversee that blockchain and rip through it with AI tools will eliminate it.”

It should be noted, however, that many of Tether’s  have found themselves on the receiving end of fraud or AML enforcement actions by US state or federal agencies.

These include Alameda Research, the FTX-affiliated trading firm; Binance market-maker Cumberland; Tether and Bitfinex parent company iFinex; the Nexo wallet platform; and market-maker Jump Crypto.

All of these entities were deemed “KYC-appropriate” when they became direct customers of Tether.

Tether’s lack of transparency probed

Cantwell also asked Lutnick whether he believes that issuers of US dollar stablecoins should face mandatory audit requirements.

Although it was founded in 2014, Tether has famously never been audited, despite its executives promising on numerous occasions since 2017 that an audit will be conducted in the “next few months”.

As such, Tether remains the largest financial institution in history to have never been audited.

Nonetheless, Lutnick said he believes that Tether should be audited, and that all US dollar stablecoins should also be 100 percent backed by US Treasury bills.

According to Tether’s latest — an unaudited sample of its reserves — Tether holds $94bn of US Treasury bills and $17bn of reverse repurchase agreements backed by US Treasury bills.

The remaining $32bn of its purported reserve assets are held mostly in money market funds, precious metals and Bitcoin.

Potential conflicts of interest

When asked by lawmakers whether he or Cantor Fitzgerald “owns” Tether, or has ever “owned” its stablecoin, Lutnick said no.

He noted that Cantor currently owns a convertible bond issued by Tether, which gives it the right to 5 percent of Tether’s equity if the bond is converted. This would be worth about $600m, as per Cantor’s valuation of the company.

At present, Lutnick is technically still chair and CEO of Cantor Fitzgerald, having announced last year that he would resign from these posts, as well as other corporate posts, upon his confirmation by the Senate.

In a  to the US Office of Government Ethics, Lutnick listed more than 800 corporate entities of which he is currently an executive.

He also declared that he has earned almost $200m from Cantor Fitzgerald during the past year.

Cantwell said that Lutnick’s potential conflicts of interest pose a “very big challenge” to his confirmation.