The recent introduction of the Lummis-Gillibrand Payment Stablecoin Act has sparked controversy within the crypto industry. Critics, including former Blockchain Association member Jake Chervinsky, have expressed strong opposition to the proposed bill. Chervinsky labeled the act as “deeply flawed” and warned that it would only allow for centralized and custodial stablecoins. He emphasized the importance of regulating custodial stablecoins while postponing regulations on algorithmic stablecoins pending further research.
Aaron Day, Chairman and CEO of the Daylight Freedom Foundation, echoed Chervinsky’s sentiments by arguing against the ban on algorithmic stablecoins. Day suggested that the bill would ultimately benefit traditional banks rather than the crypto industry. He pointed out that the involvement of banks in stablecoins could pave the way for central bank digital currencies (CBDCs). Despite these concerns, the Federal Reserve has reiterated its lack of interest in issuing a CBDC, citing the existence of the Fed Now system.
FOX Business reporter Eleanor Terrett shed light on the behind-the-scenes developments of the Lummis-Gillibrand bill. According to her sources in Washington, DC, the initial version of the bill did not contain as restrictive measures as the current proposal. Lawmakers strived to find a middle ground on hot-button issues, including the regulation of algorithmic stablecoins. While the reasoning behind the shift in perspective remains undisclosed, it is evident that various stakeholders are less than enthusiastic about the bill in its current form.
One of the central provisions of the Lummis-Gillibrand Payment Stablecoin Act is the explicit ban on unbacked algorithmic stablecoins. The legislation does not offer a specific incident that prompted this prohibition, but the collapse of Terraform Labs’ TerraUSD in May 2022 likely influenced lawmakers. The collapse, which caused an $80 billion loss in the crypto market, raised concerns about the valuation methods of algorithmic stablecoins. Despite the concerns, other algorithmic stablecoins like Ampleforth (USDD) and Frax (FRAX) have maintained stability relative to the US dollar.
The proposed bill places restrictions on stablecoin issuance, limiting it to depository and non-depository trust institutions. Existing stablecoin firms may face challenges in complying with the new regulations, as the bill lacks a clear roadmap for adaptation. Furthermore, the legislation aims to curb illicit activities involving stablecoins by introducing distinct federal and state regulatory frameworks.
The debate surrounding the Lummis-Gillibrand Payment Stablecoin Act highlights the complex dynamics between cryptocurrency innovation and regulatory oversight. While the bill seeks to address potential risks associated with stablecoin issuance, it has faced significant pushback from industry experts and stakeholders. As the legislative process unfolds, it remains crucial for policymakers to strike a balance between fostering innovation and safeguarding financial integrity in the digital asset space.
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