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New law on stablecoins proposed in the United States: but what are the pros and cons?
Some elements of the Payment Stablecoin Act could potentially benefit American consumers, but critics say other parts are “unconstitutional.”
Republican Cynthia Lummis and Democrat Kirsten Gillibrand have become something of a bipartisan, pro-crypto double act in Congress, leading the push to offer regulatory clarity on digital assets in the US
Their latest legislative effort focused on stablecoins, both arguing that a well-defined framework is needed to protect consumers and ensure the dollar remains dominant as digital payments continue to gain momentum.
One of the most significant proposals in the Lummis-Gillibrand Payment Stablecoin Act would see a total ban on algorithmic stablecoins in the United States, preventing the launch of coins that are not backed by real-world assets. This is a clear reference to the catastrophe surrounding Terraform Labs’ UST, which went into a death spiral after losing its dollar peg in 2022.
This particular proposal has sparked concern among some advocacy groups, particularly Coin Center. While the nonprofit has made it clear that it is not a supporter of the UST, it argues that an outright ban on algorithmic stablecoins is “not only bad policy but also unconstitutional.” The think tank’s executive director, Jerry Brito, supported:
“There may be ‘algorithmic stablecoins’ that (unlike Terra) are completely decentralized, with no issuers or promoters making any promises. In these cases, the ban on ‘algorithmic stablecoins’ is essentially a ban on publishing code, which would violate legal to freedom of speech.”
Jerry Brito
Other areas of the Payment Stablecoin Act also raise more questions than answers. For one thing, it leaves the status of some digital assets, such as MakerDAO’s decentralized DAI offering, unclear to say the least.
There could also be headaches for Circle, which issues USDC, the world’s second-largest stablecoin with a market capitalization of $33 billion at the time of writing. The company is based in Massachusetts, meaning it would fall firmly under the Payment Stablecoin Act. Given that the proposals state that trust companies would only be able to issue up to $10 billion in stablecoins, Circle would not be able to operate in its current form without becoming a regulated depository institution.
While both politicians rightly argue that USD-denominated stablecoins based in other jurisdictions are “currently writing rules for the dollar,” it is also unclear how these rules might apply to Tether. USDT dominates the industry with a market capitalization of $110 billion, but is based offshore. Also S&P Global research suggest that, of the $145 billion dollar-pegged stablecoin market, about 80% was issued outside the United States
Source: S&P Global
Promising measures
Elements of the Payment Stablecoin Act have the potential to be beneficial to American consumers.
First and foremost, any legislation that opens the door to mass adoption of stablecoin payments is to be welcomed. As Lummis and Gillibrand note, cross-border transactions using legacy systems can take up to 10 days to complete and often incur very high fees. In contrast, stablecoins offer near-instant settlement at much lower costs.
This could be transformative for remittances, which involve foreign workers sending funds to their families. World Bank data suggest this sector was worth approximately $669 billion in 2023, but the typical cost of remittances is 6.2%. This is 41 billion dollars that could have brought benefits to local economies, all eaten up by transaction fees.
If signed into law, these proposals would introduce safeguards to ensure that all stablecoins are adequately collateralized on a one-to-one basis with dollars held in reserve and introduce FDIC deposit insurance in the event that an issuer fails. In the banking industry, this currently automatically protects customers in the amount of $250,000.
Lummis and Gillibrand also argue that the measures could temper the prospect of de-dollarization as major economies around the world work to build their financial systems – “enshrining American values and the dollar as the base currency for the global economy from 4.5 trillion dollars.” Mohamed Damak and Andrew O’Neill, lead credit analysts at S&P Global, continued to suggest that the bill’s passage could lead to banks issuing their own stablecoins.
The big question now is whether the Payments Stablecoin Act will pass and how. The global law firm Akin warned:
“As attention focuses on the upcoming elections and legislative activity slows, there are limited opportunities to get the bill through Congress.”
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