Legislation to regulate stablecoins that’s being drafted in the House would place a two-year ban on coins similar to TerraUSD, the algorithmic stablecoin that collapsed earlier this year.
Under the latest version of the bill, it would be illegal to issue or create new “endogenously collateralized stablecoins,” according to a copy obtained by Bloomberg.
The definition would kick in for stablecoins marketed as being able to be converted, redeemed or repurchased for a fixed amount of monetary value, and that rely solely on the value of another digital asset from the same creator to maintain their fixed price.
TerraUSD(UST) was designed to maintain a 1-to-1 peg to the US dollar through an algorithm and trading in a sister token called Luna. It crashed in May.
House Financial Services Committee Chairwoman Maxine Waters and Patrick McHenry have been working to reach an agreement on the stablecoin legislation, though people familiar with the discussions said it’s unclear if McHenry, a Republican, has approved the latest draft.
Terms of the proposal could still change before a final version is released.
In addition to addressing what unfolded with Terra, the bill would allow banks and nonbanks to issue stablecoins.
Bank issuers would seek approval from their typical federal regulators, such as the OCC(Office of the Comptroller of the Currency).
The legislation would direct the Fed to establish a process for making decisions on applications from nonbank issuers.
The bill would also preserve a role for state regulators.
Nonbank stablecoin issuers approved at the state level and that register with the Fed within 180 days of that approval would be able to operate under the bill.
The legislation would prohibit businesses from commingling customers funds -- including stablecoins, private keys and cash -- with company assets in an effort to protect consumers in cases of bankruptcy.
It’s possible the panel could vote on the bill as early as next week, the people familiar with the discussions said.
The panel’s window for considering the bill before the end of the year is shrinking, with the upcoming midterm elections throwing a wrench into the process.
Some analysts who are falimiar with this matter say issuing a stablecoin without approval from appropriate regulators could Be punishable by up to five Years in prison and a $1 million fine under draft house bill.