New Stablecoin Issuers Could Face Jail Sentences If This House Bill Passes

New reports suggest that a potential stablecoin regulation framework could outlaw assets like TerraUSD for two years is in the works.

According to the media Bloomberg, based on the copy of the bill, it would be unlawful to issue or produce new “endogenously collateralized stablecoins.”

Months of stablecoin deliberation

Earlier this year, the algorithmic stablecoin Terra USD (UST) de-pegged from the dollar. The debacle that imbalanced the burning and minting mechanism of the ecosystem wiped off over $40 billion. Therefore, stablecoins advertised as having a constant exchange rate and entirely dependent on the value of another digital asset produced by the same developer to maintain their fixed price would fall under the criteria, rendering them illegal.

To safeguard investors further, in the event of bankruptcy, the legislation would also reportedly forbid companies from combining customer funds, including stablecoins, private keys, and cash, with company assets.

On Sept. 23, U.S. Treasury Secretary Janet L. Yellen is set to preside over a meeting of the Financial Stability Oversight Council through a videoconference, and a decision around the stablecoin legislation could come in on the day. However, one of the committee’s most senior Democrats, Brad Sherman, told Bloomberg that a markup date was not yet established.

The increased role of the Fed and other watchdogs

The legislation would require Treasury to conduct a study on tokens similar to Terra in consultation with the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Securities and Exchange Commission, as per the report. Meanwhile, Maxine Waters (D), the chairwoman of the House Financial Services Committee, and Patrick McHenry (R), the ranking member, have been attempting to come to terms on stablecoin legislation. However, sources familiar with the talks say it’s unclear whether the Republican member has approved the most recent version of the bill.

Last year in November, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) joined the President’s Working Group on Financial Markets (PWG) in releasing a study on stablecoins.

At the time, Treasury Secretary Yellen argued, “Stablecoins that are well-designed and subject to appropriate oversight [have] the potential to support beneficial payments options. But the absence of appropriate oversight presents risks to users and the broader system.”

A group effort

Since then, a bipartisan group of U.S. lawmakers has been deliberating on new legislation seeking to establish a regulatory framework for stablecoins. Especially when Tether, the world’s largest stablecoin, has increasingly come under the radar for disclosure of its reserves.

Last year’s proposal also included ensuring that stablecoin issuers are insured depository institutions or function like banks in this regard. The new legislation will reportedly permit banks and non-banks to produce stablecoins. However, Bloomberg reports that banks would need approval from federal authorities, like the OCC, while the Fed would create a procedure for deciding applications from non-bank issuers.

Notably, Waters and McHenry’s bill is also expected to envision a prominent role for the Federal Reserve. 

Additionally, the law would maintain the function of state regulators. The bill would permit non-bank stablecoin issuers that have received state approval to operate as long as they registered with the Fed within 180 days of that approval.