The recent legislative bill introduced by US Senators Cynthia Lummis and Kirsten Gillibrand regarding a proposed ban on algorithmic stablecoins has sparked controversy within the crypto industry. Industry experts, including former Blockchain Association member Jake Chervinsky, have criticized the Lummis-Gillibrand Payment Stablecoin Act as “deeply flawed.” Chervinsky expressed concerns that the bill would only allow for centralized and custodial stablecoins, going against the principles he highlighted in his previous testimony to Congress in 2023.
Aaron Day, Chairman and CEO of the Daylight Freedom Foundation, and a fellow at the Brownstone Institute, also opposed the proposed ban on algorithmic stablecoins. Day argued that the bill would ultimately benefit banks rather than the crypto industry. He highlighted that banks’ involvement in stablecoins could pave the way for the introduction of central bank digital currencies (CBDCs). Despite this, the Federal Reserve has stated that it currently has no plans to issue a CBDC due to the existence of the Fed Now system.
According to FOX Business reporter Eleanor Terrett, the initial version of the Lummis-Gillibrand bill did not include as many restrictions as the current proposal. Sources in Washington, DC suggested that lawmakers initially aimed for moderate positions on contentious issues, including the regulation of algorithmic stablecoins. However, the bill’s current state has drawn criticism from various affected parties, despite its bipartisan support. Lawmakers have not disclosed the reasoning behind the shift in their perspective.
One key section of the Lummis-Gillibrand Payment Stablecoin Act explicitly prohibits unbacked algorithmic stablecoins. While the bill and its supporters have not provided a specific incident to justify the ban, the collapse of Terraform Labs’ TerraUSD in May 2022 likely influenced the decision to include the prohibition in the legislation. The collapse of TerraUSD resulted in an $80 billion loss in the crypto market, raising concerns about the reliability of algorithmic valuation methods. As other algorithmic stablecoins like Ampleforth (USDD) and Frax (FRAX) continue to operate close to the value of the US dollar, the debate on the regulation of algorithmic stablecoins remains ongoing.
The Lummis-Gillibrand bill restricts the issuance of stablecoins to depository institutions and non-depository trust institutions while failing to provide a clear compliance path for existing stablecoin firms. Additionally, the bill aims to prevent the illicit use of stablecoins and establishes separate federal and state regulatory regimes. These specific requirements have raised concerns among industry stakeholders regarding the potential impact on innovation and competition within the crypto market.
The debate surrounding the regulation of algorithmic stablecoins continues to evolve as lawmakers and industry experts grapple with the complexities of balancing innovation and security in the crypto space. The implications of the proposed ban and regulatory requirements outlined in the Lummis-Gillibrand Payment Stablecoin Act remain a topic of intense debate within the crypto community.
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