Draft House bill proposes a two-year ban on algo stablecoins

Under the new legislation, which can be voted on as soon as next week, it would be illegal to issue or create new algorithmic stablecoins similar to the infamous TerraUSD that collapsed earlier this year.

According to a draft obtained by Bloomberg, the bill would impose a two-year ban on the creation or issuance of new “endogenously collateralized stablecoins.” However, existing algorithmic stablecoin providers would be granted a grace period of two years to rewire their business model and assure that their offerings are properly collateralized.

The legislation is designed to provide regulatory agencies with a two-year window to study UST-like tokens. Such a task is mainly reserved for the U.S. Treasury, but other regulators would be involved as well, including the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Securities and Exchange Commission (SEC), and Federal Reserve.

In the context of the new legislation, “endogenously collateralized” stands for stablecoins that solely depend on the value of the underlying asset from the same creator to maintain their peg. Before the original article was updated, many wondered if DAI, an ETH-backed decentralized stablecoin issued by MakerDAO, could fall under the ban, but for now, it looks like it isn’t at risk. However, the bill jeopardizes other smaller stablecoins, including Synthetix USD (SUSD), which is backed by SNX token of the same protocol, and BitUSD, which is collateralized by BitShares (BTS).

Additionally, the legislation would allow US banks and other financial institutions to issue their own stablecoins after receiving approval from their typical regulatory agency, such as the OCC. Non-bank stablecoin providers would be granted approval within 180 days from registration with the Fed. The bill also prohibits the comingling of customers’ funds with the assets of an issuer, which in theory is meant to protect stablecoin users from losing their money in case of an issuer’s insolvency.

The bill, which has been in the works for months, is a response to the need to regulate the stablecoin market after the devastating Terra/Luna crash that wiped off over $40 billion within days and resulted in a widespread crypto market contagion. Do Kwon, the CEO of Terraform Labs, was recently reported to be on the run as South Korean prosecutors asked Interpol to issue a red notice for a disgraced founder.

The U.S. Treasury Secretary Janet Yellen repeatedly cited the UST collapse as a pretext for tighter regulatory control over the crypto industry. Similarly, Rep. Maxine Waters (D-CA), House Financial Services Committee Chairwoman, who has been closely working on the stablecoin regulation, said earlier this year that "investigations have shown that many of these so-called stablecoins are not, in fact, backed fully by reserve assets," and that a lack of investor protections could even "threaten U.S. financial stability."

FatMan, an anonymous Terra whistleblower known for exposing Do Kwon’s shadow wallets, also voiced his opinion on the new legislation.

“In many ways, Do Kwon set the crypto space back by years. Most Terra fans don't even realize that the "decentralization maxi" spiel was pure LARP - Terra was one of the most centralized L1s, and UST's primary backing ($3b in BTC) was sitting in one guy's wallet with no oversight,” he tweeted.