U.S. House Draft Bill to Impose a Two Year Ban on New Algorithmic Stablecoins

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Legislation to regulate stablecoins that’s being drafted in the House would place a two-year ban on coins similar to TerraUSD, the algorithmic stablecoin that collapsed earlier this year. Under the latest version of the bill, it would be illegal to issue or create new “endogenously collateralized stablecoins,” according to a copy obtained by Bloomberg. The definition would kick in for stablecoins marketed as being able to be converted, redeemed or repurchased for a fixed amount of monetary value, and that rely solely on the value of another digital asset from the same creator to maintain their fixed price.

[Versprille, A. House Stablecoin Bill Would Put Two-Year Ban on Terra-Like Coins. (Accessed September 21, 2022)].

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"Endogenously,' means something created or synthesized within an organism or system. In order to maintain the $1 value of TerraUSD, Luna and TerraUSD before they imploded in May respectively, its creators relied upon an algorithm to mint Luna or burn it. Within days, more than $40 billion of value disappeared. This has made the collapse Exhibit A in crypto critics’ playbook and intensified the interest in lawmakers and regulators [Ozawa, R. Latest Draft of US Crypto Law Would Temporarily Ban Terra-Like Stablecoins. (Accessed September 21, 2022)].

As such, "[t]he bill raises concerns over whether stablecoins such as Synthetix USD (SUSD) would fall under the definition, as it is currently collateralized with the native asset of the same protocol in the SNX token. Other algo-stablecoins with a similar structure include BitUSD which is backed by BitShares (BTS)" [Coghlan,J. Draft US stablecoin bill would ban new algo stablecoins for 2 years. (Accessed September 21, 2022)].

In it's draft form "the legislation includes a grace period of two years for existing algorithmic stablecoin providers to change their models and collateralize their offerings differently" [Id].

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"Alongside dedicated research on algorithmic stablecoins and consulting with the Federal Reserve, the Securities and Exchange Commission [SEC], the Federal Deposit Insurance Corporation [FDIC], and the Office of the Comptroller of the Currency [OCC], the U.S. Treasury is required to comply with the proposed legislation" [Kiran, S. U.S Government may ban Algorithmic Stablecoins. (Accessed September 21, 2022)].

In addition to addressing what unfolded with Terra, the bill would allow banks and nonbanks to issue stablecoins. Bank issuers would seek approval from their typical federal regulators, such as the OCC. The legislation would direct the Fed to establish a process for making decisions on applications from nonbank issuers. The bill would also preserve a role for state regulators. Nonbank stablecoin issuers approved at the state level and that register with the Fed within 180 days of that approval would be able to operate under the bill.

[Versprille, supra].

And finally, "[t]he legislation would prohibit businesses from commingling customers funds -- including stablecoins, private keys and cash -- with company assets in an effort to protect consumers in cases of bankruptcy. And it would direct the Fed to study the impact of a potential US digital dollar -- also known as a central bank digital currency -- including the possible effects on the financial system and banking sector, as well as the privacy of Americans. (emphasis added) [Id].

"It’s possible the panel could vote on the bill as early as next week, as Bloomberg reports people familiar with the legislation state Democratic Representative Maxine Waters and Republican Patrick McHenry have been working to reach an agreement on the legislation, although it’s unknown if McHenry approved the latest draft. Waters Chairs the House Financial Services Committee, of which McHenry is a ranking member, both heard testimony at a hearing Tuesday that USD-backed stablecoins could enhance national security due to the perceived prestige and reliability of the dollar" [Coghlan, supra].

"But Brad Sherman, one of the most senior Democrats on the committee, told Bloomberg Tuesday that a markup date hasn’t yet been decided. The panel’s window for considering the bill before the end of the year is shrinking, with the upcoming midterm elections throwing a wrench into the process" [Versprille, supra].

"The dramatic downfall of Terra occurred several months ago, but the shockwaves of its collapse continue to linger" [Kiran, supra].

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