House Stablecoin Bill to Seek Two-year Ban on Issuing New Algorithmic Stablecoins

Bloomberg reported Wednesday that legislation to regulate stablecoins being drafted in the U.S. House of Representatives would impose a two-year ban on new algorithmic stablecoins similar to TerraUSD (UST).

The latest version of the act defines "endogenously collateralized stablecoins" and makes it illegal to issue or create such stablecoins.

The definition would apply to publicly selling stablecoins that are capable of being exchanged, redeemed, or repurchased for a fixed amount of monetary value and that maintain their fixed price solely on the value of another digital asset from the same creator.

The bill provides a two-year grace period for stablecoin operators not collateralized by cash or highly liquid assets such as U.S. Treasuries to be approved after changing their business model.

The bill would also prohibit mixed management of client funds and keys with those of the stablecoin issuer, which, in theory, means that customers will be able to more easily get back their assets if the stablecoin issuer goes bankrupt.

In addition to addressing Terra's problems, the bill would allow banks and non-banks to issue stablecoins, regulated by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

The bill also highlights concerns over whether the definition includes stablecoins such as Synthetix USD (SUSD). Synthetix USD is currently collateralized with the native asset of the same protocol in the SNX token. Other algorithmic stablecoins with similar structures include BitUSD, backed by BitShares (BTS).

Issuing stablecoins without the approval of these regulators could be convicted by up to five years in prison and a $1 million fine. The legislation would direct the Fed to establish a process for making decisions on applications from non-bank issuers.

The draft legislation would authorize the U.S. Treasury Department to research UST-like stablecoins in consultation with the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the U.S. Securities and Exchange Commission, and House committees could vote on the legislation as early as next week.

In mid-June, the Terra stablecoin TerraUSD (UST) was off the $1 level it was supposed to hold, trading at $0.006, losing its peg to the U.S. dollar resulting in tens of billions of dollars in lost value.