Latest Draft of US Crypto Law Would Temporarily Ban Terra-Like Stablecoins

As part of its effort to regulate cryptos in the US, leaders of the House Financial Services Committee have been attempting to negotiate the terms of a proposed bill. According to Bloomberg, authorities have taken decisions to subject algorithmic stablecoins like TerraUSD (UST) to a two years ban. Within this period, authorities would conduct a study on endogenously collateralized” tokens.

It is important to note that Terra heavily relied on algorithms to burn Luna to ensure that the stablecoin maintains its value at $1. However, the Luna and TerraUSD ecosystem collapsed, sending $40 billion in value down the drain. This has forced regulators and lawmakers to take a serious look at stablecoins. Treasury Secretary Janet Yellen on most occasions called for crypto regulation citing the Terra crash and the huge market meltdown as a reason.

The draft is with chair Rep. Maxine Waters (D-CA), pending review by the ranking member Rep. Patrick McHenry (R-NC). In the previous version of the draft, all stablecoins in circulation were required to maintain 1:1 liquid reserves. Once the bill is passed, it is expected that banks and other financial institutions will be able to issue stablecoins while working with their network regulators.

Rep. Waters in a report entitled “Digital Assets and the Future of Finance: The President’s Working Group on Financial Markets’ Report on Stablecoins” observed that most stablecoins are not fully backed by reserve assets. In addition to that, the US financial stability could be threatened by speculation trading and a lack of investor protection in the market. Stablecoins also pose risk to market integrity and illicit finance according to the report.

“The Report also highlighted systemic risk concerns due to the threat of stablecoin runs when they are not fully backed, the concentration of economic power concerns, and regulatory gaps in effectively overseeing the stablecoin market,” said the report.

It is important to note that the committee has been working on the stablecoin bill for months. However, the establishment of a regulatory regime was pushed back to after the August recess.

“Although the Ranking Member, Secretary Yellen and I have made considerable progress towards an agreement on the legislation, we are unfortunately not there yet, and will therefore continue our negotiations over the August recess,” Rep. Waters said.