Once again, a hefty week of crypto news is turning back to U.S. digital asset regulation. After reconvening in Washington earlier this month, lawmakers passionate about the crypto world seem to be hitting the ground running. This week, one bill being drafted pertains a sector of particular interest in recent months: stablecoins. If passed, the bill could lead to a ban on certain types of dollar-pegged assets.
It only makes sense that stablecoin legislation is a big priority for lawmakers. There’s a solid case blaming the TerraClassicUSD (USTC-USD) stablecoin for the market crash back in May. Had USTC retained its $1 peg, Terra Classic (LUNC-USD) prices may have retained their own value, preventing crypto investing institutions from falling into debt and later bankruptcy.
Central Bank Digital Currencies (CBDCs) are also becoming a point of interest. For one, China has been testing its own CBDC with relative success. Recently, the nation expanded these tests to its public transportation infrastructure, as well as its most populous provinces. Now, lawmakers say a U.S. digital currency — CBDC or otherwise — is a “unanimous need” if the nation hopes to compete with China.
Back in March, President Joe Biden signed the first crypto executive order and discussion of a CBDC took center stage. Included in the order is a directive for different government institutions to study stablecoins and their effects, both intended and unintended. The Terra meltdown has obviously affected these working groups’ angles of interest. Terra has been in the minds of Congresspeople working on legislation, too, as evidenced by recent draft bill news.
Crypto News: Lawmakers Seek to Ban Algorithmic Stablecoins
This week’s government crypto news focuses on a bill from the House Financial Services Committee. The group has been working on the piece of legislature for months now. Before Congress’ August recess, the bill — co-sponsored by ranking members Rep. Maxine Waters and Rep. Patrick McHenry — would require stablecoin providers to keep a 1-to-1 reserve backing. Now, the bill could provide a way to ban algorithmic stablecoins outright.
The White House is not shying away from USTC’s role in the crypto crash. While it doesn’t explicitly name the coin, Biden’s new comprehensive crypto framework opens by talking about a “so-called stablecoin” and how its crash “wiped out over $600 billion of investor and consumer funds.”
The fact that USTC is an algorithmic stablecoin may be spooking lawmakers into banning that type of stablecoin outright. According to new reports, the re-drafted bill will carry provisions that ban algorithmic stablecoins for at least two years if carried into law. The ban will give lawmakers more time to study this type of stablecoin, after which they may be able to create more robust legislation around them.
Algorithmic stablecoins, unlike collateralized ones, do not need to have any reserves underlying them — at least in theory. That’s because they rely on automated smart contracts which automatically adjust supply to be perfectly in line with demand. However, as investors saw with USTC, the model isn’t foolproof. When a large influx of USTC trades occurred simultaneously, the protocol could not handle it. This then led to a de-pegging of USTC and the rapid crypto collapse.
The re-drafted bill is currently still sitting with Waters, who chairs the Financial Services Committee. It may also need further reviewing by McHenry before moving beyond the committee.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.