Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced bipartisan legislation that includes guardrails for stablecoins, a unique form of cryptocurrency.
Lummis and Gillibrand announced the long-awaited legislation on Wednesday morning. The Lummis-Gillibrand Payment Stablecoin Act creates a regulatory framework for payment stablecoins, which have quickly grown in popularity over the last few years.
Stablecoins, while a form of cryptocurrency, differ in major respects from traditional crypto assets, such as bitcoin and ether. Stablecoins, which now make up a multibillion-dollar market, tie their value to an underlying asset, such as gold or fiat currency. The backing of assets is meant to ensure they don’t wildly fluctuate in value.
To maintain a stable value against the underlying asset, stablecoins are meant to be backed by reserves. So, if a stablecoin were to be tied one-to-one with the dollar, the entity behind that stablecoin should have $10 million in cash reserves in a bank as backing for 10 million stablecoins.
The Lummis-Gillibrand legislation requires stablecoin issuers to maintain one-to-one reserves and bans unbacked, algorithmic stablecoins. It also prevents the illegal or unauthorized use of stablecoins by issuers and users.
The legislation additionally creates federal and state regulatory regimes for stablecoin issuers.
“In order to meet the growing demand for our ever-evolving financial industry, we need to craft legislation that strikes the careful balance of establishing a clear and workable framework for stablecoins while protecting consumers,” Lummis said in a statement.
The legislation makes it so that U.S.-approved issuers may only issue dollar-backed stablecoins. It also gives the Federal Deposit Insurance Corporation power of conservatorship and resolution if a stablecoin company experiences insolvency.
Stablecoins are frequently used to buy or sell cryptocurrencies and other digital assets.
They are also used in more traditional exchange. For instance, while apps such as Venmo might work in the United States and the West, in developing countries, stablecoins could be seen as a viable way to exchange goods and services. Additionally, stablecoins can be used in cross-border payments.
Members of both parties are looking to pass stablecoin legislation before the 2024 election, given the massive growing market for such cryptocurrencies.
Recent years have seen massive failures of stablecoins and huge losses to investors holding the cryptocurrencies. Most notable was the 2022 collapse of stablecoin TerraUSD, which caused a chain reaction that wiped out $40 billion in crypto market value.
“Passing a regulatory framework for stablecoins is absolutely critical to maintaining the U.S. dollar’s dominance, promoting responsible innovation, protecting consumers and cracking down on money laundering and illicit finance,” Gillibrand said.
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Rep. Patrick McHenry (R-NC), chairman of the House Financial Services Committee, is also working on stablecoin legislation. He recently said that he thinks legislation could make its way to President Joe Biden’s desk in the coming months.
“I think we can get our stablecoin policy set through and signed into law,” McHenry said at an event in Washington. “That will be the first sign that there is hope and that there is bipartisanship when it comes to this world of digital assets.”