U.S. Senators Lummis, Gillibrand Take on Stablecoin Legislation With New Bill

Senators Cynthia Lummis of Wyoming and Kirsten Gillibrand of New York are proposing a new bill aimed at regulating stablecoins, which are types of cryptocurrencies that keep their value connected to other assets or currencies, within the United States.

Lawmakers introduced a new bill on Wednesday aiming to regulate stablecoins, a type of crypto asset. According to the proposed legislation, stablecoin issuers would need to establish reserves and operate under specific guidelines, such as setting up separate entities solely for issuing stablecoins. Additionally, these issuers would be required to deal exclusively with tokens pegged to the US dollar.

A stablecoin defined in the bill as a payment stablecoin is any digital asset that functions as a dollar equivalent for transactions or settling debts. The creators of such assets are required to convert the stablecoins back to dollars. These assets do not fall under the category of securities. The issuers can be either non-depository trust companies registered with the Federal Reserve Board of Governors or national payment stablecoin issuers authorized by regulatory bodies. Both state and federal regulators will have jurisdiction over these entities.

According to the proposed legislation, stablecoin issuers must guarantee that their tokens are fully collateralized with reserve assets and make this information publicly available. Additionally, they must select a non-depository trust as their custodian, who in turn must engage a depository institution as a sub-custodian. In simpler terms, the law demands that stablecoin issuers keep enough assets to cover their tokens’ value and share this information with the public. They must also choose a trusted organization (non-depository trust) to hold these reserves, which itself must work with a bank (depository institution).

The legislation seems to prohibit algorithmically stabilized stablecoins, which function without the traditional collateral and instead rely on complex algorithms to keep their worth consistent.

Gillibrand emphasized the importance of establishing regulations for stablecoins to preserve the US dollar’s leading position in global finance. The suggested legislation aims to keep the current two-tiered banking structure in place.

She explained that the bill will ensure consumer protection by imposing one-to-one reserves, banning algorithmic stablecoins, and making stablecoin issuers adhere to U.S. anti-money laundering and sanctions regulations. To create the most effective legislation, her team collaborated closely with relevant federal and state agencies, and she believes this bill has the potential to gain the required approval in both the Senate and the House.

In a similar statement, Lummis, her counterpart, acknowledged that the legislation aligns with “the increasing need of our dynamic financial sector for continuous adaptation.” This perspective resonates with Gillibrand’s stance on the dual banking system and the prevalence of the US dollar.

The legislation sets a cap of $10 billion for non-depository trust institutions to issue payment stablecoins. If an issuer surpasses this amount, they must transform into a depository institution that has been granted permission as a national payment stablecoin issuer, according to the bill. Currently, Circle, the largest U.S.-based stablecoin issuer with $33 billion in outstanding (USDC), is not categorized as a depository trust institution. Paxos, the second-largest, holds a limited purpose trust charter from New York’s Department of Financial Services but does not reach the $10 billion threshold. A Senate staffer noted that this $10 billion limit approximates the difference between a small community bank and a larger regional financial institution with potential systemic risk.

Lummis and Gillibrand have teamed up to propose several pieces of legislation concerning the digital assets sector. One bill from last summer aims to establish clear-cut definitions for decentralized finance and determine the regulatory scope for agencies like the Commodity Futures Trading Commission regarding crypto. Despite not making progress, they have consulted with federal regulators and the White House for their input.

Lawmakers have been working diligently on passing regulations specifically for stablecoins in the United States, given their significance within the crypto sector. The chair of the House Financial Services Committee, Patrick McHenry (R-N.C.), and ranking member Maxine Waters (D-Calif.) have led this efforts for some time. A bill concerning stablecoins even made it out of committee last year; however, its progress came to a halt following the departure of then-Speaker of the House Kevin McCarthy.

Last week, according to Punchbowl News’ report, Senator Chuck Schumer (D-N.Y., the Senate Majority Leader) held a meeting with McHenry and Waters to explore the possibility of attaching stablecoin legislation to a bill renewing the Federal Aviation Administration’s authorization. This bill is considered essential and is expected to pass. On Tuesday, Senator Sherrod Brown, who heads the Senate Banking Committee, indicated that stablecoin legislation could progress if it contained specific protective measures.