Draft US stablecoin bill would ban new algo stablecoins for 2 years

Draft legislation in the United States House of Representatives would place a two-year ban on new algorithmic stablecoins such as TerraClassicUSD (USTC) which de-pegged from the US dollar earlier this year causing widespread crypto market contagion.

The bill would criminalize the creation or issuance of new “endogenously collateralized stablecoins,” according to a current draft of the legislation obtained by Bloomberg.

However the legislation includes a grace period of two-years for existing algorithmic stablecoin providers to change their models and collateralize their offering differently.

The definition would reportedly cover stablecoins which depend on the value of another virtual asset from the same creator to maintain its price and is marketed as having the ability to be converted, repurchased or otherwise redeemed for a fixed price.

The bill raises concerns over whether stablecoins such as Synthetix USD (SUSD) would be captured by the definition, as it is currently collateralized with the native asset of the same protocol in the SNX token. Other algo-stablecoins with a similar structure include BitUSD which is backed by BitShares (BTS).

Those well-educated on crypto understand that Terra doesn't represent all stablecoins, Celsius wasn't DeFi, 3AC had nothing to do with the technology, etc.But as in all things, it's a lot harder to engage with those nuances than to simply say "crypto bad, regulate it to death."

The draft bill also mandates the U.S. Treasury to undertake a study on algorithmic stablecoins and consult with the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

It’s possible the panel could vote on the bill as early as next week, Bloomberg reports people familiar with the legislation state Democratic Representative Maxine Waters and Republican Patrick McHenry have been working to reach an agreement on the legislation, although it's unknown if McHenry approved the latest draft.

Related: The crypto industry can trust Cynthia Lummis to get regulation right

Waters Chairs the House Financial Services Committee, of which McHenry is a Ranking Member, both heard testimony at a hearing Tuesday that U.S. dollar-backed stablecoins could enhance national security due to the perceived prestige and reliability of the dollar.

TerraClassicUSD (USTC), formerly known as TerraUSD (UST) is an algorithmic stablecoin which lost its 1:1 peg with the U.S. dollar in early May hitting an all-time low of $0.006 in mid-June which resulted in tens of billions of dollars worth of losses.