- Senator Cynthia Lummis has introduced the Payment Stablecoin Act which is intended to create clear rules for stablecoins.
- The bill, co-sponsored by Senator Gillibrand aims to provide a regulatory framework for stablecoins that will offer protection to customers while mitigating money laundering and other forms of illegal finance.
US Senator from Wyoming, Cynthia Lummis, has introduced the Payment Stablecoin Act, which she described as the “most comprehensive stablecoin bill to date.” Announcing the bill, Lummis recognized how crypto assets are revolutionizing the world while highlighting the need for the US – being the leader in financial innovation – to embrace crypto assets with clear rules for stablecoins.
Landmark Bi-partisan Stablecoin Bill To Protect Consumers
Lummis and Democrat Senator Kirsten Gillibrand introduced the bi-partisan Lummis-Gillibrand Payment Stablecoin Act with four primary goals in mind, one of which is consumer protection.
To offer adequate protection to consumers, the bill proposes the creation of stablecoin-issuing subsidiaries for banks and trust companies with no stablecoin affiliation whatsoever. It also requires stablecoin issuers to align with strict capital and reserve requirements including ensuring that they have a 1:1 reserve with their stablecoins fully backed by cash or its equivalents.
The bill also forbids US-approved issuers from issuing non-US-dollar-backed stablecoins. That way, it looks to prevent the issuance of algorithm stablecoins in the market. Algorithm stablecoins, otherwise called undercollateralized stablecoins lack the 1:1 cash backing necessary to create stability and transparency – making them less trustworthy than collateralized stablecoins – since they are more prone to fluctuations.
In addition, the bill accords the FDIC (Federal Deposit Insurance Commission) conservatorship and receivership authority just in case an issuer becomes insolvent.
Payment Stablecoin Act To Promote Responsible Innovation
By providing an explicit framework for US dollar-backed stablecoins, the bill promotes consumer-friendly innovation that can facilitate unfolding advancements in the US FinTech ecosystem.
Innovators can leverage the clear regulatory background to build apps and systems that can facilitate faster global financial transactions and offer consumers greater control over their funds and a variety of options for their financial transactions.
In the crypto industry, the dread for bills like this usually stems from the fear that they might be strategically designed to drag back the present level of innovation into the aged traditional system. However, Senator Lummis assures that this new bill “allows innovation to prosper.”
Prevent Illicit Finance and Money Laundering
The development of compliant US-issued stablecoins will help to unify global rules for such stablecoins amid the growing rulemaking for the US dollar in other countries. That way, the government can leverage legislation with stringent penalties against issuers of US dollar-denominated stablecoins to cut off funding from terrorist organizations like Hamas and Hezbollah, and bad state actors like North Korea, Russia, and Chinese drug traffickers.
In a press release, Gillibrand noted that “unregulated, offshore stablecoins are a significant source of illicit finance” citing the United Nation’s estimate that $17 billion of offshore stablecoins has facilitated “illicit financing, illegal commodity trades, and criminal activity” just between 2022 and 2023. The bill aims to cripple the use of stablecoins to finance terror.
Preserves The Dual Banking System Between Federal And State Institutions
The bill maintains the current banking system, allowing states to retain the authority over non-depository trust companies, while the Federal Reserve keeps its guardianship role in US money creation.
“The legislation maintains the dual banking system that is critical to preserving the parity enjoyed by the state and federal financial institutions and establishes guardrails for existing issuers,” wrote Lummis.
While the Federal Reserve and state financial regulators are allowed to “take independent, but coordinated, enforcement action against a depository institution issuer,” they must act unanimously for trust companies below $10 billion.
According to Lummis, “The bill authorizes state non-depository trust companies to issue payment stablecoins up to $10 billion”. However, “limited-purpose state/OCC depository institutions authorized” could issue any amount. The bi-partisan stablecoin bill has been praised by many, with Coinbase’s Chief Legal Officer Stuart Alderoty saying “Innovation is not (and should never be) partisan.”