The recent introduction of the Lummis-Gillibrand Payment Stablecoin Act by US Senators Cynthia Lummis and Kirsten Gillibrand has sparked controversy within the crypto industry. Former Blockchain Association member Jake Chervinsky criticized the bill, calling it “deeply flawed” and warning that it would only allow for centralized and custodial stablecoins. Chervinsky’s concerns stem from the fact that the proposed ban on algorithmic stablecoins goes against the principles he outlined in his previous testimony to Congress back in 2023. He emphasized the need for legislators to focus on regulating custodial stablecoins rather than jumping to regulate algorithmic stablecoins without further study.
Aaron Day, Chairman and CEO of the Daylight Freedom Foundation, and a fellow at the Brownstone Institute, also voiced his opposition to the ban on algorithmic stablecoins. Day argued that the bill would ultimately benefit banks rather than the crypto industry. He pointed out that banks’ involvement in stablecoins could potentially pave the way for central bank digital currencies (CBDCs) in the future. However, despite concerns raised by industry experts, the Federal Reserve has maintained its stance that it has no plans to issue a CBDC, citing the Fed Now system as a sufficient alternative.
FOX Business reporter Eleanor Terrett shed light on the bill’s initial draft, indicating that it did not include such stringent restrictions on algorithmic stablecoins. Based on her sources in Washington, DC, lawmakers initially aimed for more moderate positions on contentious issues, including the regulation of stablecoins. However, the bill has since evolved to include provisions that have drawn criticism from industry players. While the reasons behind this shift in perspective remain unclear, it is evident that all affected parties are not fully on board with the bill in its current state, despite its bipartisan support.
One key section of the Lummis-Gillibrand Payment Stablecoin Act explicitly prohibits unbacked algorithmic stablecoins. The bill offers no specific incident to justify this prohibition, but the collapse of Terraform Labs’ algorithmic stablecoin TerraUSD in May 2022 likely influenced lawmakers’ decision to include this ban. The collapse, which resulted in an $80 billion loss in the crypto market, raised concerns about the viability of algorithmic stablecoins. Nonetheless, other algorithmic stablecoins like Ampleforth (USDD), Frax (FRAX), and Ampleforth (AMPL) continue to circulate near the value of the US dollar, despite the challenges faced by TerraUSD.
In its current form, the bill only permits depository institutions and non-depository trust institutions to issue stablecoins, leaving existing stablecoin firms without a clear path to compliance. The legislation also aims to curb the illicit use of stablecoins and establishes distinct federal and state regulatory frameworks to govern stablecoin operations. These specific requirements pose significant challenges for industry players who must navigate a complex regulatory landscape to ensure compliance with the law.
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