US Senators Cynthia Lummis and Kirsten Gillibrand have recently introduced a legislative bill that has stirred up controversy within the crypto industry. Former Blockchain Association member Jake Chervinsky harshly criticized the Lummis-Gillibrand Payment Stablecoin Act, labeling it as “deeply flawed.” He expressed concerns that the proposed legislation would effectively limit the issuance of algorithmic stablecoins to centralized and custodial entities. Chervinsky went on to mention that the bill’s ban on algorithmic stablecoins contradicts the recommendations he made during his congressional testimony in 2023, where he emphasized the need for a more nuanced approach to stablecoin regulation.
Aaron Day, Chairman and CEO of the Daylight Freedom Foundation and a Brownstone Institute fellow, also voiced his opposition to the proposed ban on algorithmic stablecoins. He argued that such a ban would primarily benefit traditional banks at the expense of the crypto industry. Day suggested that the involvement of banks in the stablecoin sector could pave the way for the introduction of central bank digital currencies (CBDCs). However, the Federal Reserve has explicitly stated that it has no plans to issue a CBDC, citing the existence of the Fed Now system.
FOX Business reporter Eleanor Terrett shed light on the evolving nature of the Lummis-Gillibrand bill based on insider sources in Washington, DC. According to Terrett, the initial version of the bill did not contain as stringent restrictions as the current proposal. Lawmakers had initially intended to strike a balance on contentious issues, including the regulation of algorithmic stablecoins. Despite having bipartisan support on paper, all affected parties within the crypto industry have expressed hesitance towards the bill in its current form. The sources hinted at a growing pressure within the Senate for stablecoin regulation, with the bill also serving as an indirect tactic to steer lawmakers towards a separate stablecoin bill initiated by House Financial Services Committee chair Patrick McHenry.
One specific section of the Lummis-Gillibrand Payment Stablecoin Act explicitly prohibits the issuance of unbacked algorithmic stablecoins. Surprisingly, the bill does not provide any concrete incident or rationale to support this ban. However, the collapse of Terraform Labs’ algorithmic stablecoin TerraUSD in May 2022 likely influenced the lawmakers’ decision to include this prohibition. The collapse of TerraUSD resulted in a massive $80 billion loss in the crypto market, prompting concerns about the reliability of algorithmic valuation models. Despite this, other algorithmic stablecoins like Ampleforth (USDD), Frax (FRAX), and Ampleforth (AMPL) have managed to maintain parity with the US dollar.
The Lummis-Gillibrand bill, as it stands, only permits depository institutions and non-depository trust institutions to issue stablecoins. It lacks a clear framework for existing stablecoin firms to comply with the new regulations. Additionally, the bill aims to curb the illicit use of stablecoins by establishing separate federal and state regulatory regimes, alongside a set of specific requirements. The bill’s focus on preventing illegal activity within the stablecoin market reflects the broader trend of regulatory scrutiny facing the crypto industry as a whole.
The Lummis-Gillibrand Payment Stablecoin Act has sparked a wide-ranging debate within the crypto sector. While proponents argue that it represents a necessary step towards ensuring stability and security in the stablecoin market, critics contend that the proposed ban on algorithmic stablecoins could stifle innovation and impede the growth of the crypto industry. As the bill continues to navigate through the legislative process, it remains to be seen how lawmakers will address the concerns raised by various stakeholders within the crypto community.