U.S. House Bill Wants to Save Investors from Terra-Like Stablecoins

A stablecoin bill drafted in the United States House of Representatives would place a two-year ban on algorithmic stablecoins similar to TerraUSD, which are not backed by outside assets like cash and cash equivalents.

According to the report by Bloomberg on Tuesday, as contained in the latest version of the bill, it would be illegal for stablecoin issuers to issue or create new “endogenously collateralized stablecoins” – like TerraUSD, otherwise called UST – for two years.

However, the bill stated that existing operators of endogenously collateralized stablecoins will have a two-year grace period to change their business model and collateralize their offerings.

Unlike fiat-collateralized stablecoins, which are backed by a reserve of fiat currencies in regulated institutions like banks to maintain their fixed price, endogenously collateralized stablecoins rely on the value of another crypto asset from the same creator to stay stable. 

Banks and Nonbanks Would Issue Fiat-Backed Stablecoins

Per the report, the bill will allow banks and non-banks to issue fiat-backed stablecoins. Banks will seek approval from their typical federal regulators, such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., to issue stablecoins while nonbanks seek approval from the Federal Reserve.

The legislation will also direct the Federal Reserve to study the impact of a US digital dollar, including its “possible effects on the financial system and banking sector, as well as the privacy of Americans.”

The report stated that negotiation is ongoing between House Financial Services Committee Chairwoman Maxine Waters and Ranking Member Patrick McHenry to reach an agreement on the stablecoin legislation. 

The panel could vote on the bill by next week. However, Brad Sherman, a senior Democrat on the committee, noted that a markup date hasn’t been concluded yet, the report said.

Regulators Intensify Stablecoin Regulation After Terra Crash

TerraUSD (UST), an algorithmic stablecoin that was meant to be pegged 1:1 to the U.S. dollar, lost its peg in mid-May and prompted a widespread crash in the entire cryptocurrency sector, causing investors to suffer significant losses.

Since the crash, regulators in the U.S. and other countries have intensified regulations to protect investors from another Terra-like incident. In May, Janet Yellen, the secretary of the United States Treasury, said it was very important for Congress to pass legislation on stablecoins by the end of the year.

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