Bill allows non-banks to issue stablecoins and bans algorithmic coins for two years

WASHINGTON — Nearly finalized legislation between Democrats and Republicans on the House Financial Services Committee would authorize the Federal Reserve to license non-bank stablecoin issuers and introduce a two-year moratorium on algorithmic stablecoins.

House lawmakers have been working behind the scenes for months to create a bipartisan legislative framework for stablecoins, a type of digital asset designed to maintain a constant value to facilitate cryptocurrency transactions.

The latest draft is the product of weeks of back-and-forth between Democrats and Republicans. The legislative text, reviewed by American Banker on Tuesday evening, was drafted by the office of House Financial Services Speaker Maxine Waters, D-Calif., and reflects negotiations with Ranking Member Patrick McHenry, RN.C.

Rep. Maxine Waters, a Democrat from California and chair of the House Financial Services Committee, speaks with Rep. Patrick McHenry, a Republican from North Carolina and a ranking member. A stablecoin bill negotiated between McHenry and Waters has been reviewed by American Banker.

Andrew Harrer/Bloomberg

It’s still unclear if McHenry will support the latest project. Representatives for McHenry and Waters did not immediately respond to a request for comment, but McHenry told Politico he was “cautiously optimistic” a deal could be reached by the end of the 117th Congress.

Under the bill, a “payment stablecoin” would be defined as a digital asset “that is or is designed for use as a means of payment or settlement” where a stablecoin issuer would be “obligated to convert, redeem or to redeem for a fixed amount of monetary value.” Stablecoins must also maintain “a reasonable expectation that they will maintain a stable value”.

In a likely win for the fintech sector, noncustodial institutions will have the opportunity to apply for a stablecoin license from the Federal Reserve — an application process that will be public and subject to comment. Banks, for their part, will be allowed to own stable subsidiaries that would be regulated by their existing supervisors.

As Previously reported, the regulatory regime envisioned by lawmakers will require all stablecoin issuers to maintain reserves on an individual basis. The bill would allow issuers to use U.S. currency, treasury bills with a maturity of 90 days or less, 7-day repurchase agreements backed by treasury bills, and reserve deposits of the central bank.

One of the most controversial elements of the bill for Republicans will be its harsh treatment of algorithmic stablecoins, a subgroup of digital assets that gained considerable notoriety when the TerraUSD crypto project collapsed in May. TerraUSD had used an algorithm to try to maintain its peg to the US dollar.

Under the bill, it would be illegal to issue “endogenously backed stablecoins” in the United States for two years. The Treasury Department will be authorized to conduct a study of algorithmic coins, working with regulators from the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Reserve, and Securities and Exchange Commission.

American banker Previously reported that the legislation’s treatment of algorithmic stablecoins was a flashpoint between Democratic and GOP policymakers. Another area of ​​disagreement concerned consumer protections for digital wallets, where consumers and institutions hold crypto. The most recent version of the bill contains no reference to digital wallets.

The project also authorizes the Federal Reserve to conduct a study on “the impact of a U.S. central bank digital currency,” better known as the digital dollar. However, the legislation does not allow the Fed to create a CBDC. The Treasury Department last week published a report on digital assets that seemed to make the case for a digital currency while stopping short of ordering the Fed to do so.

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