Senators Introduce Bipartisan Legislation to Create US Stablecoin Regulatory Framework | Practical Law

Senators Introduce Bipartisan Legislation to Create US Stablecoin Regulatory Framework | Practical Law

US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Lummis-Gillibrand Payment Stablecoin Act, proposed bipartisan legislation designed to create a regulatory framework for payment stablecoins.

Senators Introduce Bipartisan Legislation to Create US Stablecoin Regulatory Framework

by Practical Law Finance
Published on 27 Apr 2024USA (National/Federal)
US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Lummis-Gillibrand Payment Stablecoin Act, proposed bipartisan legislation designed to create a regulatory framework for payment stablecoins.
On April 17, 2024, US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Lummis-Gillibrand Payment Stablecoin Act, bipartisan legislation designed to create a regulatory framework for payment stablecoins. The proposed legislation would require and provide for the following:
  • For depository institutions (banks) and non-banks (trust companies) with activities unrelated to stablecoins, subsidiaries must be created for the sole function of stablecoin issuance.
  • Stablecoin issuers will be held to strict capital and reserve requirements. Issuers will need to hold one-to-one reserve requirements, ensuring that stablecoins issued are fully backed by cash and cash equivalents.
  • US-approved issuers may only issue dollar-backed stablecoins, preventing algorithmic stablecoins from entering the market.
  • FDIC conservatorship and resolution for insolvent issuers, including a detailed receivership regime, would be established under the FDIC for all payment stablecoin issuers, including order of priority, validity of claims, and classification of payment stablecoins as customer assets, not assets of the issuer.
With respect to illicit finance, the proposal notes that:
  • Unregulated, offshore stablecoins are a significant source of digital illicit finance, and the UN Office on Drugs and Crime estimated that over a one-year period between 2022 and 2023, offshore stablecoins were used for $17 billion in transactions connected to illicit financing, illegal commodity trades, and criminal activity.
  • Legislation with strong penalties for issuing a USD-denominated stablecoin without conforming to US financial crimes rules would immediately cripple a source of funds for Hamas, Hezbollah, Chinese fentanyl traffickers, North Korea, and Russian sanctions evaders.
The proposal also explains certain benefits of stablecoins that weigh in favor of facilitating a legal and regulatory framework for the stablecoin market, including that stablecoins:
  • Give users the ability to send a payment anywhere in the world nearly instantly. Legacy payment systems can take up to 7-10 days via wire transfer.
  • Are digitally native, which allow innovators to build new programs and apps that give consumers more control and flexibility to use their money.
  • Can have lower fees than current options for sending money, especially for international remittances.
The proposed legislation also addresses stablecoin custody issues and would:
  • Impose comprehensive third-party risk management on third-party contracted service providers (with an exemption for self-custody wallet providers).
  • Grant the Federal Reserve supervisory authority over service providers, except when the service provider is already supervised by another federal or state financial regulator.
  • Provide that state trust companies that are stablecoin issuers can be the legal custodians of record for payment stablecoins and reserves, but must use a federal/state chartered-depository institution as subcustodian to hold the assets.
  • Provide that depository institutions that are stablecoin issuers can perform all custodial services in relation to payment stablecoins, including being the legal custodian and actually holding the assets.
  • Provide that customer payment stablecoins and reserves relating to those stablecoins must be strictly segregated from the proprietary assets of the issuer and that rehypothecation–using collateral that a firm does not own to help finance assets–is prohibited.
The bill states that it is designed to "preserve the dual banking system as it is today," including that:
  • States’ current authority over non-depository trust companies is acknowledged and preserved (no OCC trust charter is authorized to issue stablecoins), a state trust company path is created and authorized, and the Federal Reserve retains its role as the guardian of money creation in the US.
  • The bill authorizes state trust companies to create and issue payment stablecoins up to $10 billion, with federal or state depository institutions authorized to issue any amount. For state trust companies, there is required transition planning at $9 billion and an expedited conversion process.
  • The legislation grants the Federal Reserve or state financial regulators the ability to take independent, but coordinated, enforcement action against a depository institution issuer, but the Federal Reserve and state must act jointly for trust companies below $10 billion.
A section-by-section overview of the proposed legislation was also issued.
In addition to this bill, Senators Lummis and Gillibrand are co-authors of the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA), proposed legislation that would create a comprehensive regulatory framework for crypto assets. While there have been numerous crypto bills proposed in Congress, few have gained traction, RFIA included, although it was re-issued by the senators in July 2023 (see Legal Update, Updated: Bipartisan Crypto Legislation Introduced in Congress).
The Lummis-Gillibrand Payment Stablecoin Act is introduced almost two years after another stablecoin bill that initially received some notoriety but has ultimately failed to progress, the Stablecoin TRUST Act, introduced on April 6, 2022 by US Senator Patrick Toomey of Pennsylvania (see Legal Update, US Senator Proposes Framework for Stablecoin Regulation).