Algorithmic stablecoins like the TerraUSD could be prohibited for two years under a draft law in the U.S. House of Representatives. According to a recent draft of the legislation obtained by Bloomberg, the creation or issuance of new “endogenously collateralized stablecoins” would be illegal.
The draft legislation mandates that study into algorithmic stablecoins like TerraUSD and the ramifications of a prospective U.S. digital dollar, including any potential impacts on the banking industry, financial system, and American citizens’ privacy from organizations like the Securities and Exchange Commission, Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp.
Bloomberg reports that people familiar with the draft say Democratic Representative Maxine Waters and Republican Patrick McHenry have been trying to come to an agreement on the legislation. However, it’s unclear if McHenry approved the most recent draft. The panel may vote on the proposed bill as early as next week.
According to U.S. Congressman Warren Davidson, there is a remote possibility that the U.S. House will approve the stablecoin regulation measure of Representatives before the year’s end. “There’s an outside chance we find a way to get to consensus on a stablecoin bill this year.” Davidson is well known for being pro-crypto and previously presented the “Keep Your Coins” bill, which sought to shield privately held cryptocurrency wallets from U.S. government oversight.
The current draft of the legislation does, however, give existing algorithmic stablecoin suppliers a two-year grace period to alter their algorithms and collateralize their products.
The law would permit banks and nonbanks to produce stablecoins in addition to addressing issues to what happened with Terra. Bank issuers would approach their typical federal authorities, like the Office of the Comptroller of the Currency, for approval. The proposed legislation would mandate that the Fed create a procedure for deciding applications from non-bank issuers.
Additionally, the proposed law would maintain the function of state regulators. The bill would permit nonbank stablecoin issuers that have received state approval to operate as long as they registered with the Federal Reserve within 180 days of that approval.
In an effort to safeguard clients in the event of bankruptcy, the legislation would forbid companies from combining customer funds, including stablecoins, private keys, and cash, with company assets.
Legislative Impact On Crypto
Last week, the Biden administration published a framework on how it proceeds with the regulation of virtual assets. The fact sheet covered a wide range of subjects, but it specifically touched on the Terra algorithmic stablecoin.
Back in May, the stablecoin de-pegged from the U.S. dollar, surmounting to massive sell-pressure that caused the collapse of the Terra ecosystem, erasing $60 billion in value, and catalyzed the current downtrend in the larger crypto market.
The legislation raises concerns about whether algorithmic stablecoins like Synthetix USD (SUSD) and BitUSD (BTS) will be covered under the term.
Jake Chervinsky, head of policy at Blockchain Association, took to Twitter to state, “It’s hard to overstate the damage that Terra has done to the perception of crypto in D.C.” He later added, “Those well-educated on crypto understand that Terra doesn’t represent all stablecoins.”