New U.S. Draft Bill Could Potentially Ban Algorithmic Stablecoins

Key Takeaways

  • The legislation would criminalize the creation or issuance of new “endogenously collateralized stablecoins.”
  • The draft bill grants a grace period of two years for existing algorithmic stablecoin providers to change their models.

Leaders of the House Financial Services Committee in the United States House of Representatives have now come up with draft legislation that could potentially place a two-year ban on new algorithmic stablecoins.

An algorithmic stablecoin is a type of crypto asset that relies on two types of tokens: a stablecoin and another crypto asset supporting the aforementioned stablecoin.

As per the bill’s current draft, the legislation would criminalize the creation or issuance of new “endogenously collateralized stablecoins.”

The definition would matter 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.

The legislation further makes it mandatory for the U.S. Treasury to undertake a study on algorithmic stablecoins and also consult with the Federal Reserve, the Securities and Exchange Commission(SEC), the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

The draft bill grants a grace period of two years for existing algorithmic stablecoin providers to change their models abide by the legislation, and collateralize their offerings differently.

The panel will reportedly vote on the bill as early as next week. According to media reports, Democratic Representative Maxine Waters and Republican Patrick McHenry have been working to reach an agreement on the legislation.

In a February 2022 hearing, Rep. Waters pointed out the risks of stablecoins, stating that “investigations have shown that many of these so-called stablecoins are not in fact backed fully by reserve assets” and that speculative trading coupled with a lack of investor protections “could even threaten U.S. financial stability.”

Earlier versions of the bill required stablecoin issuers to maintain 1:1 liquid reserves for all stablecoins in circulation and limited the types of assets that could back them.

The latest move is triggered by the imploding of algorithmic stablecoin TerraUSD in May. Following this, SEC chair Gary Gensler doubled down on the need to regulate stablecoins. He described stablecoins as a danger to consumers.

Saniya Raahath
Saniya Raahath

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