The recent legislative bill introduced 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 centralized and custodial stablecoins to operate. Chervinsky argued that the proposed ban on algorithmic stablecoins goes against the principles he outlined in his previous testimony to Congress in 2023. He emphasized the importance of regulating custodial stablecoins while refraining from regulating algorithmic stablecoins until further research is conducted. Aaron Day, Chairman and CEO of the Daylight Freedom Foundation, also expressed opposition to the ban on algorithmic stablecoins, claiming that the bill would primarily benefit banks rather than the crypto industry.
The Federal Reserve has stated that it has no plans to issue a central bank digital currency (CBDC) due to the existence of the Fed Now system. Despite this, the Lummis-Gillibrand bill has faced scrutiny for its proposed restrictions on algorithmic stablecoins. FOX Business reporter Eleanor Terrett revealed that the initial version of the bill did not contain such stringent measures, indicating a shift in lawmakers’ perspectives. While the bill enjoys bipartisan support, stakeholders in the crypto industry have expressed unease with its current state. The legislation is seen as a response to mounting pressure for stablecoin regulation in the Senate and an indirect effort to align with a separate stablecoin bill led by House Financial Services Committee chair Patrick McHenry.
A key provision in the Lummis-Gillibrand Payment Stablecoin Act explicitly prohibits unbacked algorithmic stablecoins. The collapse of Terraform Labs’ algorithmic stablecoin TerraUSD in May 2022 likely influenced lawmakers’ decision to include this restriction in the bill. The incident, which led to an $80 billion value loss in the crypto market, raised concerns about the reliability of algorithmic valuation methods. Despite this, competing algorithmic stablecoins like Ampleforth (USDD), Frax (FRAX), and Ampleforth (AMPL) have maintained their value relative to the US dollar.
The bill’s focus on permitting depository institutions and non-depository trust institutions to issue stablecoins raises questions about compliance for existing stablecoin firms. Additionally, the legislation aims to prevent the illicit use of stablecoins and introduces federal and state regulatory frameworks, imposing specific requirements on stablecoin issuers. As the debate over the regulation of algorithmic stablecoins continues, the crypto industry remains divided on the potential impact of the Lummis-Gillibrand bill. Stakeholders are closely monitoring developments to gauge the bill’s implications for the future of stablecoin issuance and regulation.