US lawmakers’ proposed ban on algorithmic stablecoins draws industry backlash

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A recent legislative bill introduced by US Senators Cynthia Lummis and Kirsten Gillibrand has drawn the crypto industry’s ire due to a proposed ban on algorithmic stablecoins.

Former Blockchain Association member Jake Chervinsky called the Lummis-Gillibrand Payment Stablecoin Act “deeply flawed” on April 17. He warned that the bill would only permit centralized and custodial stablecoins.

Chervinsky added that the proposed ban violates principles outlined in his testimony to Congress in 2023. He said in his testimony that legislators should focus on regulating custodial stablecoins and avoid regulating algorithmic stablecoins until further study.

Aaron Day, Chairman and CEO of the Daylight Freedom Foundation and a Brownstone Institute fellow, also opposed the proposed ban on algorithmic stablecoins and asserted the bill would benefit banks rather than crypto. He argued that banks’ involvement in stablecoins “sets the stage” for central bank digital currencies (CBDCs).

However, the Federal Reserve has repeatedly said it has no intention to issue a CBDC due to the Fed Now system.

Shift from

FOX Business reporter Eleanor Terrett said the Lummis-Gillibrand bill initially did not include such harsh restrictions, based on her sources in Washington, DC.

Terret said lawmakers aimed to reach “moderate positions on … contentious issues,” including but not limited to the bill’s proposed restrictions on algorithmic stablecoins.

Her sources did not reveal why lawmakers shifted their initial perspective but said that all affected parties are “not particularly excited about the bill” in its current state despite its nominally bipartisan support.

The sources added that the bill is mainly a sign of growing pressure for stablecoin regulation in the Senate and an indirect attempt to have lawmakers engage in a separate stablecoin bill led by House Financial Services Committee chair Patrick McHenry.

Bill bans unbacked stablecoins.

One section of the Lummis-Gillibrand Payment Stablecoin Act, as introduced on April 17, explicitly prohibits unbacked algorithmic stablecoins.

The bill and its backing members do not describe any incident to justify the proposed ban. However, the collapse of Terraform Labs’ algorithmic stablecoin TerraUSD in May 2022 has likely played a role in the lawmakers’ decision to include the prohibition in the legislation.

The collapse — which wiped $80 billion in value from the crypto market in May 2022 — has raised concerns about algorithmic approaches to valuation — even as other competing algorithmic stablecoins such as Ampleforth (USDD), Frax (FRAX), and Ampleforth (AMPL) continue to circulate close to the value of the US dollar.

Instead, the bill only permits depository institutions and non-depository trust institutions to issue stablecoins and does not set out a clear path to compliance for existing stablecoin firms.

The bill also aims to prevent the illegal use of stablecoins and creates separate federal and state regulatory regimes, among other specific requirements.

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