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U.S. Legislation Would Ban Algo Stablecoins for Two Years: Report

Terra Collapse Prompts Congress to Crack Down on Dollar-Pegged Token Issuers

U.S. Legislation Would Ban Algo Stablecoins for Two Years: Report

Influential members of the U.S. Congress appear  to be working on legislation that would temporarily ban certain types of algorithmic stablecoins, according to a Sept. 21 report from Bloomberg News.

The legislation would make it illegal to issue or create new “endogenously collateralized stablecoins” during a two-year period as regulators study the instruments, the news service reported

Committee Leaders

The bill is reportedly being developed by Rep. Maxine Waters (D-Ca.), the chair of the House Financial Services Committee, and Rep. Patrick McHenry (R-NC), the minority ranking member. 

Shocked by the spectacular $60B collapse of Terra and its UST stablecoin in May, the committee leaders are poised to prohibit stablecoins that are marketed as convertible for a fixed value of monetary value and are solely reliant on the value of another digital asset from the same issuer to maintain their price. 

Terra sought to maintain UST’s peg by allowing users holding the stablecoin to redeem it for $1 worth of the Terra network token, LUNA, regardless of what price UST was trading at on the open market. 

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In the wake of Terra’s collapse, Janet Yellen, the secretary of the treasury and onetime chair of the Federal Reserve, called for Congress to pass such legislation.

The algo stablecoin was designed to motivate  arbitrageurs to maintain UST’s peg in the event it traded above or below the dollar. Yet it backfired by triggering a downward spiral as public confidence in Terra cratered. 

Federal Review

As a result, UST crashed from $1 to just a few cents while LUNA plummeted from $80 to a fraction of a cent over just a couple of weeks in mid-May.

Bloomberg reported the bill will also mandate a study into tokens with a similar design to Terra and UST by the U.S. Treasury Department. The Treasury will also consult with the Federal Reserve, Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the U.S. Securities and Exchange Commission.

The bill also aims to open the door to banks and non-bank fintechs to issue stablecoins. It would request that the Federal Reserve establish a formal process for stablecoin applications, and require that bank issuers receive approval from federal regulators. 

Non-bank issuers would be regulated at a state level, but also must register with the Federal Reserve. Stablecoin issuers would be prohibited from commingling customer funds with company assets to protect consumers.

Some industry experts were skeptical about the ability of the U.S. to enforce regulations against algorithmic stablecoin issuers.

“All algorithmic stablecoins will be built offshore,” posted Vanessa Harris, an advisor to the NFT-powered streaming platform, Kavarii. “When one succeeds (and if enough people keep trying one eventually will) it will be completely decoupled from the US and their various enforcement agencies.”

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