U.S. Stablecoin Bill Targets Transparency Without Naming Tether

On April 17, Senators Kirsten Gillibrand and Cynthia Lummis introduced the 2024 Lummis-Gillibrand Responsible Payment Stablecoin Act. This bill updates the stablecoin language from their 2022 proposed financial innovation bill, which did not pass during the congressional session.

The new bill echoes the “payment stablecoin” terminology from the 2023 Payment Stablecoin Clarity Act, currently under House review. While ostensibly emphasizing stablecoins for goods and services payment, its real aim is to distinguish the dominant but controversial USDT issuer Tether from its more compliant U.S. rival, Circle.

A key hurdle in the House bill is the debate over who should oversee stablecoin issuers, with Republicans favoring state-level regulation and Democrats advocating some federal oversight.

The Lummis-Gillibrand bill seeks to bridge this gap, allowing state non-depository trust companies to issue stablecoins valued under $10 billion, while the Office of the Comptroller of the Currency (OCC) would oversee higher-valued issuances. State issuers nearing a $9 billion cap must plan a transition to the over $10 billion category within 180 days.

Both the OCC and the Federal Reserve can independently enforce actions against larger issuers but must collaborate with state governments for those under $10 billion.

The bill bans “algorithmic stablecoins” like UST, which collapsed in spring 2022 when its complex formula tied to Terraform’s LUNA token proved unsustainable.

Stablecoin reserves must be held in a 1:1 ratio with cash or cash equivalents, including short-term Treasury bills and repurchase agreements backed by Treasuries with maturities under one year.

Issuers must report monthly on assets backing payment stablecoins, their value, and the outstanding stablecoin amount, a blow to Tether’s U.S. ambitions. Known for refusing third-party audits, Tether instead issues unconvincing “proofs of reserve.”

Issuers have one business day to fulfill redemption requests, regardless of amount. Tether is notorious for denying redemptions below $100,000 and reserves the right to refuse redemptions at any time for any reason.

Following the bill’s announcement, Gillibrand told CNBC of their “great partners in the House,” working on clarifying the bill. Lummis hopes for consensus in “weeks, not months,” though admits it may wait until post-November elections.

Senator Sherrod Brown, a crypto critic, reportedly supports stablecoin legislation in his Senate Banking Committee, provided his concerns are addressed. The stablecoin language might attach to legislation allowing banks to serve licensed cannabis businesses, already passed by Brown’s committee.

CNBC’s Andrew Ross Sorkin raised Tether’s links to Iran, Russia, and illicit activities, asking how it relates to their bill. Gillibrand responded that the bill is a first step in addressing illegal finance, bringing transparency and accountability to blockchain and cryptocurrencies.

The bill doesn’t explicitly mention Tether, but its press release claims it would “immediately weaken” funding sources for Hamas, Hezbollah, Chinese fentanyl traffickers, North Korea, and Russian sanctions evaders if it penalizes stablecoins issued outside U.S. financial crime rules.

Unregistered issuers could face civil penalties up to $1 million per day. Enforcing penalties on entities like Tether, with minimal U.S. presence, could be challenging unless targeting U.S. Treasury bonds reportedly held by Cantor Fitzgerald for Tether.

Interestingly, both Tether and Circle have yet to comment publicly on the Gillibrand-Lummis bill. Tether’s silence suggests an inability to comply with U.S. regulations, particularly banking-related ones. Circle’s silence might avoid celebrating a bill that could be seen as a U.S. domestic stablecoin protection act.

U.S. digital asset exchanges Coinbase and Kraken, silent too, could see shifts in their operations. Coinbase, a Circle partner, might see USDC play a stronger role in U.S. trades, while Kraken would miss USDT’s presence.

Senator Elizabeth Warren, a crypto skeptic, may not be satisfied with the bill’s single money laundering reference. Warren recently wrote to Treasury Secretary Janet Yellen, echoing Deputy Secretary Adewale Adeyemo’s call for more tools to combat crypto fraud, including Tether.

Sentiment: Neutral