Bipartisan Legislation Introduced in the Senate to Establish a Regulatory Framework for Stablecoins

Key Takeaways

• Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) have partnered once again in the digital asset space, this time introducing the Lummis-Gillibrand Payment Stablecoin Act (S. 4155). The duo previously worked together to introduce the Lummis-Gillibrand Responsible Financial Innovation Act (S. 2281) to propose a framework for the ever-growing digital asset market.
• The bill is written with Lummis and Gillibrand’s longstanding legislative priorities in mind to address policy challenges that have plagued the digital assets, including how best to enhance consumer protections, combat illicit finance and ensure the dominance of the U.S. financial market.
• The proposal from Senators Lummis and Gillibrand adds to the ongoing stablecoin negotiations between House Financial Services Committee Chairman Patrick McHenry (R-NC) and Ranking Member Maxine Waters (D-CA). There is bipartisan support in both chambers of Congress, but there are numerous questions surrounding the process that remain unanswered.
• Both McHenry’s and Lummis and Gillibrand’s proposals have bipartisan support and are widely regarded as serious efforts, but there are several challenges that could delay congressional consideration and passage of stablecoin legislation.

Overview

On April 17, 2024, Senators Cynthia Lummis and Kirsten Gillibrand introduced the Lummis-Gillibrand Payment Stablecoin Act. The proposed bipartisan legislation would create a regulatory framework for payment of stablecoins. Its intent is to carve out space for the growth of a safe, regulated stablecoins market in the United States that preserves U.S. dollar dominance.

Analysis

Senators Lummis and Gillibrand have long sought to address key policy challenges in the digital assets space, namely establishing stronger consumer protections and combatting illicit finance. Their latest proposal attempts to resolve these concerns with stablecoins by providing regulators with novel tools to combat illicit finance, including by defining new enforcement powers for federal and state supervisors, granting regulators the authority to take enforcement actions against stablecoin issuers and authorizing the Federal Reserve Board to remove or prohibit issuers. The bill also includes consumer protection provisions akin to what exist for traditional depository institutions, such as both capital requirements and one-to-one reserve requirements, a requirement that depositary institutions and non-banks wishing to issue stablecoins create a firewalled subsidiary for that practice, and FDIC conservatorship for insolvent issuers.

The bill also goes to great lengths to entrench the U.S. dollar’s central role in the global stablecoin market. It does this primarily by mandating issuers only issue stablecoins backed by U.S. dollars, thereby requiring issuers to acquire and hold substantial dollar reserves and deterring the issuance of stablecoins based on other currencies. This is also meant to protect consumers by prohibiting unbacked, algorithmic stablecoins from entering the market, even in digitized financial markets, because issuers will need to acquire and hold substantial dollar reserves to obtain a U.S. license. 

Also included in the bill are provisions establishing strict lanes for federal regulators, including provisions preserving the dual banking system. The intent of this is to foster innovation by preventing overregulation and to bolster the authority of state regulators, thereby creating opportunities for stablecoin markets to grow in different states and localities around the country. 

While not companion legislation, the proposal from Senators Lummis and Gillibrand shares a number of similarities to Chairman McHenry’s Clarity for Stablecoins Act (H.R. 4766). By introducing their own bill, Senators Lummis and Gillibrand are not rejecting Chairman McHenry’s proposal. They likely seek to complement his efforts in the House by kickstarting the legislative process in the Senate, so that whatever differences the two chambers have can be more easily resolved.

Chairman McHenry appears to have secured critical buy-in from Ranking Member Waters on his stablecoins bill. However, as the focus turns to the upcoming election and legislative activity slows, there are limited opportunities to move the bill through Congress.

One potential legislative vehicle is the upcoming reauthorization of the Federal Aviation Administration (FAA), which earlier this year was extended to May 10. There are a number of hurdles – including the limited number of legislative days between now and May 10, the need for the House and Senate to come to an agreement on their respective bills, and other priorities in the banking policy space – that could make it difficult for a stablecoin bill to ride along with the FAA reauthorization.

Ultimately, the increased momentum suggests that Congress could enact legislation to establish a regulatory framework for stablecoins before the end of the 118^th Congress.