Recent Bloomberg Report Said that upcoming legislation would ban algorithmic stablecoins such as TerraUSD, which crashed in May this year caused the collapse of cryptocurrencies around the world.
The bill is currently being drafted in the U.S. House of Representatives.
Controlling the Stablecoin Section
The bill would make it illegal to develop or issue new “endogenously collateralized stablecoins.” This stablecoin is pegged to related cryptocurrencies from the same creator to maintain a stable price.
Tokens are sold with offers that can be converted, transferred or redeemed at a fixed price.
In the event of a breach, the issuer will have two years to reshape its operating model and pledge its tokens differently.
It was the collapse of TerraUSD, a stablecoin pegged to native cryptocurrency Luna, that led to the cryptocurrency crash in May of this year.
Three Arrows Capital, a Singapore-based cryptocurrency hedge fund, went bust due to exposure to these stablecoins.
The ensuing carnage did not spare other market participants either. Several cryptocurrency exchanges, including Zipmex, Voyager, and Vauld, also collapsed during this period.
The draft legislation also requires the Treasury Department to work with the Federal Reserve on stablecoins such as TerraUSD. Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency (OCC).
The bill also makes way for banks and non-banks to issue new stablecoins with due process. While banks need approval from federal regulators such as the OCC, non-banks need to follow a process established by the Federal Reserve.
In addition, the bill would restrict monetary institutions from mixing assets such as consumers’ cash, stablecoins and private keys with their own corporate assets.
Encryption becomes critical
KPMG Report Businesses looking for low-risk investments may show greater interest in the less volatile stablecoin virtual asset class, according to news released earlier this month.
The panel could vote on the bill as early as next week, but no date has been set, the report said. With the upcoming midterm elections, members must urgently address key economic issues such as cryptocurrencies.
However, as discussions are still ongoing, the final form of the bill is likely to be different.