Lummis, Gillibrand introduce bill prohibiting unbacked algorithmic stablecoins among other regulatory frameworks

United States Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) today introduced the Lummis-Gillibrand Payment Stablecoin Act.

The bill will require stablecoin issuers to hold one-to-one cash or cash-equivalent reserves to back their token. It prohibits unbacked algorithmic stablecoins and asserts that neither issuer nor users can use stablecoins for illicit or unauthorized purposes such as money laundering, according to an official release shared with The Block.

“Passing a regulatory framework for stablecoins is absolutely critical to maintaining the U.S. dollar’s dominance, promoting responsible innovation, protecting consumers and cracking down on money laundering and illicit finance,” said Sen. Gillibrand in a statement.

In all, the bill strives to create a framework that encourages "responsible" innovation, noting stablecoins' auspicious use cases for quick international transactions, lower fees and digitally native advantage for new programs and apps. 

Dual banking system

The bill also intends to create "federal and state regulatory regimes for stablecoin issuers that preserves the dual banking system," the release continues.

The United States dual banking system refers to how federal and state banks have different regulators, in which the federal Office of the Comptroller of the Currency oversees national banks and state regulators supervise state banks. However, a bank can be regulated at both the state and federal levels.

The Lummis-Gillibrand Payment Stablecoin Act bill would give federal and state entities agency over stablecoin chartering and enforcement. 

Issuer insolvency?

Another notable consumer protection under the bill includes a provision should a stablecoin issuer experience insolvency. The bill allows for Federal Deposit Insurance Corporation conservatorship and resolution in such a case.

"A detailed receivership regime is established under the FDIC for all payment stablecoin issuers, including order of priority, validity of claims and classification of payment stablecoins as customer assets, not assets of the issuer," according to the official release.

Prior bills

In July 2023, the two senators reintroduced the Lummis-Gillibrand Responsible Financial Innovation Act to create a clearer, comprehensive legal system for crypto assets, after initially introducing the bill in 2022, The Block previously reported.

"Crypto assets are constantly evolving, and as the industry changed during the last year, Senator Gillibrand and I worked to improve our legislation to ensure it appropriately balances consumer protections while allowing innovation to continue,” said Sen. Lummis at the time regarding the crypto asset bill's revisions. “Make no mistake, bad actors exist, but we cannot lose sight of the potential of crypto assets and distributed ledgers to modernize our financial industry."