The recent legislative bill introduced by US Senators Cynthia Lummis and Kirsten Gillibrand has sparked controversies within the crypto industry. Former Blockchain Association member Jake Chervinsky criticized the Lummis-Gillibrand Payment Stablecoin Act, labeling it as “deeply flawed” and warning against the proposed ban on algorithmic stablecoins. Chervinsky argued that the bill would only permit centralized and custodial stablecoins, going against the principles he outlined in his testimony to Congress in 2023. He emphasized the importance of focusing on regulating custodial stablecoins while deferring the regulation of algorithmic stablecoins pending further study.
Aaron Day, Chairman and CEO of the Daylight Freedom Foundation, along with being a Brownstone Institute fellow, also expressed opposition to the ban on algorithmic stablecoins. Day contended that the bill would primarily benefit banks instead of the crypto industry. He raised concerns about banks’ involvement in stablecoins potentially paving the way for central bank digital currencies (CBDCs). Despite the Federal Reserve’s stance on not issuing a CBDC due to the Fed Now system, Day’s apprehensions about the implications of the bill on the industry remain.
FOX Business reporter Eleanor Terrett shed light on the evolving dynamics behind the Lummis-Gillibrand bill. Initially, the bill did not include stringent restrictions on algorithmic stablecoins, according to sources in Washington, DC. Lawmakers aimed to find moderate positions on contentious issues but ended up introducing restrictive measures related to stablecoins. The shift in perspectives, though undisclosed in detail, highlighted the mounting pressure for stablecoin regulation in the Senate. Additionally, the bill was perceived as an indirect maneuver to engage lawmakers in a separate stablecoin bill led by House Financial Services Committee chair Patrick McHenry.
One pivotal section of the Lummis-Gillibrand Payment Stablecoin Act explicitly prohibits unbacked algorithmic stablecoins. While the bill lacks a concrete justification for this prohibition, the collapse of Terraform Labs’ TerraUSD in May 2022 likely influenced this decision. The collapse, resulting in a significant loss of value in the crypto market, raised concerns about the viability of algorithmic valuation approaches. Despite this, other algorithmic stablecoins like Ampleforth (USDD), Frax (FRAX), and Ampleforth (AMPL) have maintained their value relative to the US dollar.
The bill primarily allows depository institutions and non-depository trust institutions to issue stablecoins, sidelining existing stablecoin firms. It fails to provide a clear compliance path for these firms, adding to uncertainties within the industry. Moreover, the bill seeks to curb the illicit use of stablecoins by creating separate federal and state regulatory frameworks, introducing specific regulatory requirements that could disrupt the existing ecosystem.
The Lummis-Gillibrand Payment Stablecoin Act has faced vehement opposition and skepticism from industry experts due to its flawed approach towards regulating stablecoins. The proposed ban on algorithmic stablecoins, coupled with ambiguities in compliance and regulatory frameworks, poses serious challenges to the crypto industry. As stakeholders continue to voice their concerns, the fate of the bill and its implications on the industry remain uncertain.
