Diminishing Hopes for Stablecoin Legislation as Election Looms

As Congress gears up for election season, the timeline for a stablecoin bill is tightening. Senators Cynthia Lummis and Kirsten Gillibrand recently introduced a bill outlining regulations for stablecoins issued by US companies, addressing concerns such as maintaining their peg and consumer protection. However, concerns remain regarding the bill's provisions, including the blanket ban on algorithmic stablecoins and limited oversight of foreign company-issued tokens, such as Tether. With the election season looming, the likelihood of progress on stablecoin legislation is dwindling, and any significant action may be deferred until the lame-duck session or even January.

Diminishing Prospects for a Stablecoin Law

The legislative timeline for introducing, debating, and passing a stablecoin bill is rapidly closing as Congress enters the election season. Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) recently proposed a joint bill addressing stablecoin regulation in the United States, marking the latest attempt to address this pressing issue. However, the likelihood of its success remains uncertain.

Background

Stablecoins, a $160 billion segment of the cryptocurrency market, have garnered significant attention in recent months. They are digital assets pegged to stable values, typically the US dollar, and are often used as a medium of exchange or a store of value. The lack of comprehensive regulation in this sector has become a growing concern, prompting legislative efforts to establish a regulatory framework.

The Lummis-Gillibrand Bill

The Lummis-Gillibrand bill proposes a detailed framework for overseeing stablecoins issued by US companies. It outlines requirements for maintaining stable pegs, including a ban on algorithmic stablecoins, which rely solely on market forces to maintain their value. The bill also provides for federal and state oversight of stablecoin issuers and establishes a Federal Deposit Insurance Corporation (FDIC) process for potential collapses.

Industry Concerns

Industry participants have raised concerns about the bill's limitations. It lacks provisions for crypto-backed tokens like DAI, which are decentralized and not pegged to the US dollar. Moreover, the blanket ban on algorithmic stablecoins has been criticized as overly restrictive.

Foreign Stablecoins

The bill primarily focuses on stablecoins issued by US companies, leaving the treatment of foreign-issued tokens, such as Tether (USDT), unclear. While the bill's press release states that "malign actors will no longer have the option to use unregulated foreign stablecoins," it lacks a specific mechanism to prevent their use.

Domestic Stablecoin Issuers

The bill proposes a $10 billion threshold above which stablecoin issuers must be state or federally chartered depository institutions. This provision could significantly impact Circle, the issuer of USDC, the second largest stablecoin by market capitalization.

Political Landscape

The upcoming election season presents a significant challenge to the passage of any major legislation. Lawmakers are expected to prioritize campaigning over esoteric issues like stablecoin regulation. Progress is likely to stall during the summer months and resume during the lame-duck session between the election and the inauguration of the new Congress.

Alternative Efforts

Efforts are also underway in the House of Representatives, with reports indicating that House Financial Services Committee Chair Patrick McHenry (R-N.C.) and Ranking Member Maxine Waters (D-Calif.) have discussed attaching a stablecoin bill to other legislation. Additionally, Senate Banking Committee Chairman Sherrod Brown (D-Ohio) has expressed support for legislation that addresses consumer protection and risk mitigation.

Conclusion

The prospects of a stablecoin law being enacted before the end of the year appear slim. The clock is ticking, political realities are shifting, and the legislative landscape is complex. While efforts to establish a regulatory framework for stablecoins are ongoing, their success remains uncertain.