The recent introduction of the Lummis-Gillibrand Payment Stablecoin Act in the US Senate has sparked a wave of criticism from key figures within the crypto industry. Among those voicing opposition to the bill is former Blockchain Association member Jake Chervinsky, who described the proposed legislation as “deeply flawed.” Chervinsky raised concerns that the bill would effectively restrict the issuance of algorithmic stablecoins, focusing instead on centralized and custodial stablecoins. This move, according to Chervinsky, contradicts the recommendations he made in his congressional testimony back in 2023, where he highlighted the importance of regulating custodial stablecoins while deferring regulation of algorithmic stablecoins pending further review.
Joining Chervinsky in criticizing the bill is Aaron Day, Chairman and CEO of the Daylight Freedom Foundation and a fellow at the Brownstone Institute. Day argued that the ban on algorithmic stablecoins would ultimately benefit traditional banks at the expense of the crypto sector. He emphasized that the involvement of banks in stablecoin issuance could pave the way for the introduction of central bank digital currencies (CBDCs). Despite this, the Federal Reserve has consistently maintained that it has no immediate plans to roll out a CBDC, citing the existence of the Fed Now system.
Insights from FOX Business reporter Eleanor Terrett suggest that the original iteration of the Lummis-Gillibrand bill did not include such stringent restrictions on stablecoins. Sources within Washington, DC indicated that lawmakers initially aimed for more moderate positions on contentious issues, including the regulation of algorithmic stablecoins. However, the bill’s current form reflects a departure from this approach, leading to discontent among stakeholders despite the nominal bipartisan support it has garnered. The sources did not disclose the exact rationale behind the shift in lawmakers’ perspectives, but they indicated a broader push for stablecoin regulation within the Senate, potentially influenced by a separate stablecoin bill led by House Financial Services Committee chair Patrick McHenry.
Justification for the Ban
One of the key provisions of the Lummis-Gillibrand Payment Stablecoin Act explicitly prohibits the issuance of unbacked algorithmic stablecoins. Although the bill and its proponents did not cite specific incidents to justify this prohibition, the collapse of Terraform Labs’ algorithmic stablecoin TerraUSD in May 2022 likely informed their decision. The collapse, which resulted in an $80 billion loss across the crypto market, raised red flags regarding the reliability of algorithmic valuation methodologies. Despite this, other algorithmic stablecoins like Ampleforth (USDD), Frax (FRAX), and Ampleforth (AMPL) continue to circulate, maintaining close pegs to the US dollar.
Regulatory Implications and Future Prospects
Apart from the ban on algorithmic stablecoins, the Lummis-Gillibrand bill also imposes restrictions on stablecoin issuance by allowing only depository institutions and non-depository trust institutions to issue stablecoins. However, the legislation falls short of providing clear guidance on compliance for existing stablecoin firms, leaving many in the industry uncertain about their future operations. Additionally, the bill introduces measures to curb illegal activities involving stablecoins and establishes separate regulatory frameworks at both federal and state levels, adding to the complexity of compliance for stakeholders in the crypto space.
The Lummis-Gillibrand Payment Stablecoin Act has ignited a fierce debate within the crypto community, with experts and industry players raising valid concerns about the proposed ban on algorithmic stablecoins and the broader implications of the bill for the sector. As the legislative process unfolds, it will be crucial for policymakers to engage with stakeholders and consider the diverse perspectives to strike a balance between fostering innovation and ensuring regulatory clarity in the rapidly evolving crypto landscape.
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