The global economy has been gradually moving towards dollarization, where the U.S. dollar becomes increasingly dominant worldwide. This trend, though slow, has been real and likely to continue. In this context, supporting U.S. dollar stablecoins appeared as an easy win for Congress.
The U.S. Treasury stood to benefit significantly from issuers purchasing U.S. government debt to back these stablecoins. As a result, stablecoin regulation emerged as an attractive gateway for Congress to exert influence.
Key Provisions of the Lummis-Gillibrand Act
The Lummis-Gillibrand Payment Stablecoin Act proposed key regulations for stablecoin issuers, including:
One-to-one reserves: Issuers would need to maintain reserves in cash or liquid equivalents like U.S. Treasury bills.
Monthly attestations: Issuers would be required to file monthly reports on their reserves.
Compliance with sanctions: The bill mandated compliance with anti-money laundering provisions and U.S. government-imposed sanctions.
Ban on algorithmic stablecoins: Following the Terra collapse in 2022, the bill proposed a ban on algorithmic stablecoins.
Impact on Stablecoin Issuers
The bill was set to affect existing stablecoins like Tether (USDT), which would not have met the bill's stringent requirements. Tether’s offshore status and reserve composition would have disqualified it, favoring U.S.-based Circle instead. However, Circle would still need additional licenses to comply with the bill's regulations.
Stablecoin Failures and Federal Oversight
The bill proposed that stablecoin failures be handled by the Federal Deposit Insurance Corporation (FDIC), similar to bank failures. This ambitious proposal aimed to bring stablecoins under tighter regulation but could face resistance from crypto skeptics in Congress.
Regulatory Challenges for Crypto
The bill highlighted the ongoing regulatory challenges for the U.S. crypto industry. It sought to classify stablecoins as non-securities, potentially shielding them from the SEC’s aggressive actions but increasing government control.
The Legislative Outlook
As the 2024 election approached, the chances of passing significant crypto legislation became slim. However, a shift in political power could change the regulatory landscape for stablecoins, depending on the outcome of the election.
The Lummis-Gillibrand Act aimed to reshape the future of U.S. dollar stablecoins, presenting challenges and opportunities for the industry. As the political climate evolved, the crypto industry awaited the outcome, hoping for regulation that would support innovation while ensuring stability.
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