Senators propose new Bill regulating stablecoins, bans algorithmic variants

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On April 17, 2024, U.S. Senators Kirsten Gillibrand and Cynthia Lummis introduced the bipartisan Lummis-Gillibrand Payment Stablecoin Act, a landmark Bill that creates a regulatory framework for payment stablecoins. The legislation aims to protect consumers, enable innovation, and promote U.S. dollar dominance while preserving the dual banking system.

During the press release, Senator Lummis emphasised, “To meet the growing demand in our ever-evolving financial industry, we need legislation that strikes a careful balance, establishing a clear and workable framework for stablecoins while protecting consumers.”

The Bill allows state non-depository trust companies to issue payment stablecoins up to $10 billion, with limited-purpose state/OCC depository institutions authorised to issue any amount. This provision sets clear limits on issuance while maintaining flexibility for different types of financial institutions.

Notably, the legislation restricts the issuance of stablecoins to those backed by the U.S. Dollar and approved by US regulators, preventing algorithmic stablecoins from entering the market.

At the press release, Senator Gillibrand further stated, “The bipartisan Lummis-Gillibrand Payment Stablecoin Act preserves the dual banking system and gives both federal and state agencies roles in chartering and enforcement. It protects consumers by mandating one-to-one reserves, prohibiting algorithmic stablecoins, and requiring stablecoin issuers to comply with U.S. anti-money laundering and sanctions rules.”

Furthermore, the legislation imposes rigorous third-party risk management measures on service providers, excluding self-hosted wallets. The Federal Reserve is granted supervisory authority over these arrangements, except in cases where the service provider is already under the supervision of another federal or state financial regulator.

“Proper custody practices for issuers are essential, especially in light of FTX,” explained a one-page document explaining the Bill's highlights.

The bill was reportedly created with technical assistance from the Federal Reserve, Department of the Treasury, National Economic Council, New York Department of Financial Services, Wyoming Division of Banking, and Federal Deposit Insurance Corporation.

Tether (USDT), the largest stablecoin, has reached a market cap of $109 billion with a 0.07% increase in the past week, while USD Coin (USDC) stands at $32.62 billion, experiencing a 0.02% increase.

Shashank is the founder of yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash