Senator Cynthia Lummis and Senator Kristen Gillibrand released a draft bill last week to require stablecoin issuers to maintain one-to-one reserves and prohibits unbacked algorithmic stablecoins. 

The Lummis-Gillibrand Payment Stablecoin Act also prevents illicit or unauthorized use of stablecoins and creates a regulatory framework for the digital assets while preserving the dual banking system. Senate Banking Committee Chairman Sherrod Brown stated he’s ready to move on stablecoin legislation. 

Chris Land, general counsel to Senator Lummis, said the legislation contains provisions to address failed stablecoin payments. “You’re not going to see big money investors or Wall Street get involved in the stablecoin space unless they have assurances that if something does go wrong, they’ll be able to get their money back,” Land said at the PGP* for Crypto event in Washington D.C. last week.  

The largest stablecoin, Tether, has about $110 billion in outstanding issuance while Circle’s USDC has created $33 billion in coins pegged to the U.S. dollar. Some policymakers see stablecoins as a competing currency with the dollar, the world’s reserve currency, though legislation in the U.S. to regulate the digital assets has been slow. (For more, see Tether’s Endurance in the Web3 Rewind newsletter.)

Land said passing legislation in the Senate is harder than it should be. “We have to play three-dimensional chess to get legislation passed,” he said.  

The current state of play in Congress is like a “giant mixing bowl of bills with completely unrelated priorities with judicial nominations and presidential year politics,” said Dave Grimaldi, executive vice president of government relations at the Blockchain Association.

“We have our eyes on illicit finance, anti-money laundering and the prospect of a Treasury proposal being enshrined into something that gets included in an omnibus crypto legislative package,” Grimaldi said. That would include stablecoin pieces, the market structure bill and an illicit finance component, he said. 

He cited the significance of last week’s testimony from Wally Adeyemo, the Deputy Secretary of the Treasury, about illicit finance. Adeyemo noted the need for a secondary sanctions regime to target digital assets providers overseas. The Blockchain Association responded to similar concerns by previously noting that illicit activity using digital assets accounts for 0.34 percent of all transactions, a decrease from 2022.

However, “if it means the illicit finance pieces that Senate Democrats want can also be enacted, that's where those compromises in unmarked rooms in the U.S. Capitol occur,” Grimaldi said. “Do we need to pair it with safer banking permissions? Do we pair it with cannabis? Do we pair it with clawing back executive compensation? These are things that Senate Democrats want. Will they swallow a Republican-written house product or pieces of it?” 

Congress has a little more than two months left in the legislative calendar this year to get it over the line. “There is buy-in from the highest levels of the White House and the leadership,” Land said.