Leading officials in U.S. financial regulation, including Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen, and Deputy Treasury Secretary Wally Adeyemo, have recently advocated for Congressional regulation of stablecoins.

On April 17, U.S. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the bipartisan Lummis-Gillibrand Payment Stablecoin Act, aimed at creating a regulatory framework for payment stablecoins. This legislation seeks to enhance consumer protection, promote responsible innovation, prevent illicit finance, protect American interests, address custody issues, and preserve the dual banking system.

Consumer Protection: The act mandates that stablecoin issuers create subsidiaries specifically for stablecoin issuance, adhere to strict capital and reserve requirements, and maintain one-to-one reserves to ensure all stablecoins are fully backed by cash or cash equivalents. It also prohibits the issuance of unbacked, algorithmic stablecoins.

Responsible Innovation: The legislation provides a clear regulatory framework that enables the use of stablecoins for instant global payments and supports the development of new applications that offer greater control and flexibility over personal finances, potentially reducing fees for transactions, especially international remittances.

Preventing Illicit Finance: The bill aims to harmonize global rules for dollar-denominated stablecoins, deterring the use of unregulated offshore stablecoins for illicit financing. It establishes strong penalties for any entity that issues a USD-denominated stablecoin without adhering to U.S. financial crimes rules.

Protecting American Interests: By setting standards for U.S.-issued stablecoins, the bill supports the U.S. dollar as the dominant digital exchange medium and counters foreign efforts to establish alternative financial systems. This enhances the role of the dollar in the global digital economy and ensures that U.S.-issued stablecoins reflect American values.

Addressing Custody: The bill requires that stablecoin issuers, whether state trust companies or depository institutions, be the legal custodians of record for payment stablecoins and their reserves. It prohibits rehypothecation and mandates strict segregation of customer assets from the issuer’s proprietary assets.

Preserving the Dual Banking System: It maintains the existing authority of state regulators over non-depository trust companies and allows state trust companies and federal or state depository institutions to issue stablecoins, ensuring a balanced regulatory approach that respects both state and federal roles.

According to the press release, Senator Gillibrand had this to say:

“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. The bipartisan Lummis-Gillibrand Payment Stablecoin Act preserves the dual banking system and gives both federal and state agencies roles in chartering and enforcement. It protects consumers by mandating one-to-one reserves, prohibiting algorithmic stablecoins, and requiring stablecoin issuers to comply with U.S. anti-money laundering and sanctions rules. To draft the strongest bill possible, our offices worked closely with the relevant federal and state agencies and I’m confident this legislation can earn the necessary support in the Senate and the House.”

Additionally, Senators Lummis and Gillibrand have collaborated on the Lummis-Gillibrand Responsible Financial Innovation Act, a piece of legislation designed to establish a comprehensive regulatory framework for cryptoassets.

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