US Senators Unveil Comprehensive Stablecoin Regulation Bill

In a significant legislative move, US Senators Cynthia Lummis and Kirsten Gillibrand introduced a comprehensive bill aimed at establishing a regulatory framework for stablecoins. The bipartisan Lummis-Gillibrand Payment Stablecoin Act seeks to address the growing need for regulation in the digital asset space, particularly focusing on stablecoins, which have become integral to the cryptocurrency ecosystem.

Key Provisions of the Lummis-Gillibrand Payment Stablecoin Act

The newly introduced bill encompasses several critical provisions designed to promote responsible innovation while safeguarding consumers and maintaining financial stability. Key aspects of the legislation include:

• Prohibition of Unbacked Algorithmic Stablecoins: The bill explicitly bans unbacked algorithmic stablecoins, a move likely influenced by the collapse of TerraUSD (UST) in 2022. This measure aims to prevent similar destabilizing events in the future.
• One-to-One Reserves Requirement: Stablecoin issuers are required to maintain reserves of cash or cash equivalents at a one-to-one ratio to back their tokens. This provision ensures that stablecoins are fully collateralized, enhancing their stability and reliability.
• State and Federal Regulatory Frameworks: The legislation establishes both state and federal regulatory regimes for stablecoin issuers. State non-depository trust companies can issue up to $10 billion in payment stablecoins, while authorized institutions can issue stablecoins “up to any amount” under a limited-purpose state charter. This dual framework aims to provide flexibility while ensuring robust oversight.
• Custody and Safekeeping: The bill outlines stringent requirements for the custody and safekeeping of stablecoins. Custodial services must treat and protect customer assets, ensuring they are kept separate from the custodian’s proprietary assets. This provision is designed to protect customers’ assets from any claims by the custodian’s creditors.
• Supervision and Enforcement: Comprehensive supervision and enforcement powers are granted to state bank supervisors, the Office of the Comptroller of the Currency (OCC), and the Federal Reserve Board (FRB). These authorities can impose civil monetary penalties, issue cease-and-desist orders, and oversee the financial and operational practices of stablecoin issuers.
• Holding Company Supervision: The bill introduces a tailored supervision framework for holding companies of stablecoin issuers. It restricts activities to those “financial in nature” and requires approval from the FRB and applicable state or federal authorities for mergers and acquisitions.
• Conservatorship and Receivership: To bolster confidence in stablecoin issuers, the bill establishes a conservatorship and receivership regime managed by the Federal Deposit Insurance Corporation (FDIC). This regime addresses the priority of claims, asset disposition, and related procedures in case of an issuer’s insolvency.

Legislative Background and Goals

The introduction of this bill follows extensive collaboration between Senators Lummis and Gillibrand, federal and state agencies, and industry stakeholders. The legislators emphasized that their goal is to create a framework that fosters innovation while protecting consumers and preventing illicit activities, such as money laundering and terrorism financing.

“Passing a regulatory framework for stablecoins is absolutely critical to maintaining the U.S. dollar’s dominance, promoting responsible innovation, protecting consumers, and cracking down on money laundering and illicit finance,” stated Senator Gillibrand. Senator Lummis added, “To meet the growing demand for our ever-evolving financial industry, we need to craft legislation that strikes the careful balance of establishing a clear and workable framework for stablecoins while protecting consumers.”

Industry and Regulatory Reactions

The stablecoin industry has been under increased scrutiny, particularly after high-profile incidents like the collapse of TerraUSD. This bill is seen as a proactive step towards establishing clear regulatory guidelines that could help prevent such events and promote the healthy growth of the digital asset market.

Senator Sherrod Brown, chair of the Senate Banking Committee, has indicated support for stablecoin regulation, highlighting its importance in the legislative agenda. However, the bill’s passage will require navigating the complexities of bipartisan support and addressing various stakeholders’ concerns.

Potential Impact on the Stablecoin Market

The enactment of the Lummis-Gillibrand Payment Stablecoin Act could significantly impact the stablecoin market by providing a structured regulatory environment. This move is expected to enhance investor confidence, encourage innovation, and position the United States as a leader in digital asset regulation.

By ensuring that stablecoins are fully backed and subject to rigorous oversight, the bill aims to mitigate risks associated with their use, including financial instability and illicit activities. Furthermore, the establishment of clear guidelines for custody and supervision is likely to attract more institutional participation in the stablecoin market, promoting its growth and integration into the broader financial system.

In conclusion, the Lummis-Gillibrand Payment Stablecoin Act represents a comprehensive effort to regulate stablecoins in the United States. By addressing key issues such as backing requirements, regulatory oversight, and custody practices, the bill aims to ensure the stability and integrity of the stablecoin market while fostering innovation and protecting consumers. As the legislative process unfolds, the bill’s provisions will likely shape the future of digital asset regulation in the United States.