October 6, 2022

A recent Bloomberg report stated that the upcoming law will ban algorithmic stablecoins such as TerraUSD which collapsed in May of this year leading to a global cryptocurrency crash.

The aforementioned bill is currently being drafted in the US House.

Stablecoin segment control

The bill would make it illegal to develop or issue new “endogenously collateralized stablecoins.” Such a stablecoin is pegged to a related cryptocurrency of the same creator to maintain a stable price.

The token is sold with the proposition that it can be converted, transferred or redeemed at a fixed price.

In the event of a breach, the issuer will be given two years to reshape its operating model and secure its coins differently.

It was the collapse of the stablecoin, TerraUSD, tied to its parent cryptocurrency named Luna, that led to the cryptocurrency crash in May of this year.

Singapore-based cryptocurrency hedge fund Three Arrows Capital went bankrupt due to exposure to these stablecoins.

The bloodshed that followed did not spare other players in the market either. Several cryptocurrency exchanges such as Zipmex, Voyager and Vauld also collapsed during this period.

The bill also mandates that the Treasury Department, along with the Federal Reserve, conduct a study on stablecoins such as TerraUSD. The Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (OCC).

The draft law also allows banks and non-banks to issue new stablecoins after due process. While banks would have to seek approval from federal regulators like the OCC, non-banks would have to follow a process established by the Fed.

In addition, the bill would also restrict monetary institutions from commingling consumer funds such as cash, stablecoins and private keys with their own company assets.

Crypto issues become critical

KPMG report published earlier this month said companies looking for low-risk investments are likely to show more interest in the less volatile virtual asset class of stablecoins.

The report said it was possible the council could vote on the bill as early as next week, but no date has been decided at this time. With the upcoming mid-term elections, it is imperative that members urgently address critical economic issues such as cryptocurrency.

However, as the debate is still ongoing, the final form of the bill could very well vary.

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