Overview of the Lummis-Gillibrand Payment Stablecoin Act

On April 17, 2024, U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the bipartisan Lummis-Gillibrand Payment Stablecoin Act. This landmark legislation aims to create a comprehensive regulatory framework for payment stablecoins, balancing innovation with consumer protection and ensuring the U.S. maintains its leadership in the global financial landscape. In this article, we’ll provide a detailed overview of the Lummis-Gillibrand Act, its significance, and its potential impact on various stakeholders. Readers will gain an understanding of the key provisions, the importance of the Act, and its implications for the world of regulation and compliance.

Lummis-Gillibrand Background and Purpose

The Lummis-Gillibrand Payment Stablecoin Act is designed to provide clarity and structure to the rapidly evolving world of stablecoins. Stablecoins are digital assets pegged to a stable reserve asset, such as the U.S. dollar, making them less volatile than cryptocurrencies like Bitcoin. The Act aims to:

1. Protect Consumers: By ensuring stablecoin issuers maintain one-to-one reserves and prohibiting unbacked, algorithmic stablecoins.
2. Prevent Illicit Finance: By enforcing compliance with anti-money laundering (AML) and sanctions regulations.
3. Encourage Innovation: By providing a clear regulatory framework that supports the development of new financial technologies.

Stablecoins in Scope

• Payment Stablecoins: The Act defines a payment stablecoin as a digital asset that is represented or designed to maintain a stable value relative to the value of a fixed amount of U.S. dollars​.
• Algorithmic Payment Stablecoins: The issuance, creation, or origination of algorithmic payment stablecoins is prohibited under the Act.

Issuers of Stablecoins

• Depository Institutions: These can issue payment stablecoins if authorized as national payment stablecoin issuers. This includes insured depository institutions or bank holding companies that must charter a separate depository institution for this purpose​​.
  • These institutions must obtain authorization from the Comptroller or State bank supervisor and must also be approved as a national payment stablecoin issuer by the Board​
• Non-Depository Trust Companies: These can issue and redeem payment stablecoins if registered and if the value of all outstanding payment stablecoins does not exceed $10 billion. If this threshold is exceeded, the trust company must apply for a depository institution charter​.
  • They must submit an application for authorization to issue payment stablecoins to a State bank supervisor​.
• Bridge Payment Stablecoin Issuers: In cases where one or more payment stablecoin issuers are in default or in danger of default, the Corporation can organize bridge payment stablecoin issuers with specific powers and attributes to manage the situation.
• Safe Harbor for Foreign Issuers: The Act provides a safe harbor for payment stablecoin issuers that are subject to comprehensive regulation and supervision by a foreign financial regulatory authority, provided that the foreign jurisdiction's regulatory framework is deemed equivalent to that of the United States. This determination is made by the Board, in consultation with the Comptroller and State bank supervisors.

Key Provisions of the Lummis-Gillibrand Act

Consumer Protection

• One-to-One Reserves: Stablecoin issuers must maintain reserves equal to the value of the stablecoins issued, ensuring that each stablecoin is backed by a corresponding amount of U.S. dollars or equivalent assets.
• Reserves: Issuers must maintain reserves backing the payment stablecoins. These reserves should consist of high-quality, highly liquid assets, such as U.S. Treasury bills, bonds, or notes with a maturity date of 90 days or less, and repurchase agreements backed by U.S. Treasury.  
  
  

Regulatory Framework

• Federal and State Oversight: The Act preserves the dual banking system, giving both federal and state agencies roles in the chartering and regulation of stablecoin issuers.
• Chartering and Enforcement: Depository institutions and state non-depository trust companies can issue stablecoins under strict regulatory supervision, including capital and reserve requirements.
  
  

Prevention of Illicit Finance

• Compliance with Financial Crimes Rules: Stablecoin issuers must adhere to AML and sanctions regulations to prevent their use in illicit activities.
• Enhanced Due Diligence: The Act requires issuers to perform thorough due diligence on customers and counterparties.
  
  

Operational Requirements

• Segregation of Assets: Stablecoin issuers must segregate customer assets from proprietary assets, ensuring the safety of customer funds.
• Transparency and Reporting: Issuers must disclose monthly, in a publicly accessible manner, a summary description of the assets backing the payment stablecoins, their value, and the number of outstanding payment stablecoins. 
  
  

Custody and Collateral

• Third-Party Custody: Non-depository trust companies must use federally or state-chartered depository institutions as subcustodians for the safekeeping of reserves.
• Prohibition on Rehypothecation: The Act prohibits the reuse of reserve assets, except for creating liquidity to meet redemption requests.
  
  

Extraterritorial Effect

• Global Impact: The Act is designed to have extraterritorial effect, meaning it will apply to any stablecoin issuer operating in or targeting the U.S. market, regardless of their location.

Significance of the Lummis-Gillibrand Act

The introduction of the Lummis-Gillibrand Payment Stablecoin Act marks a pivotal moment in the regulation of digital assets. The significance of this Act can be summarized as follows:

Consumer Protection and Trust

The Act ensures that stablecoins are backed by real assets, which protects consumers from the risks associated with unbacked or algorithmic stablecoins. This builds trust in stablecoins as a reliable digital payment method.

Innovation and Market Stability

By providing a clear regulatory framework, the Act encourages innovation in the financial technology sector while maintaining market stability. Startups and established companies alike can develop new financial products with a clear understanding of regulatory expectations.

Combating Illicit Finance

The stringent AML and sanctions compliance requirements help combat the use of stablecoins in illegal activities. This is crucial for maintaining the integrity of the financial system and preventing illicit financial flows.

Global Leadership

With other countries, such as Japan, Singapore, and Hong Kong, developing their own regulations for stablecoins, the U.S. must establish its own framework to maintain leadership in the global financial system. The Act positions the U.S. as a leader in setting standards for digital assets.

Regulatory Clarity and Compliance

The Act provides much-needed clarity for compliance officers and regulatory bodies. It delineates the roles of federal and state agencies, ensuring a coordinated approach to regulation and enforcement.

Impact on Stakeholders

The Lummis-Gillibrand Payment Stablecoin Act has far-reaching implications for various stakeholders, including stablecoin issuers, consumers, financial institutions, regulators, and the global financial system.

Stablecoin Issuers

Issuers of stablecoins, including both depository institutions and non-depository trust companies, will need to comply with stringent reserve and operational requirements. This affects their business models and operational procedures. Issuers must ensure they have adequate reserves and adhere to the segregation and reporting requirements mandated by the Act. This may require significant adjustments to their existing practices.

Consumers

Consumers benefit from enhanced protections and the assurance that their stablecoins are backed by real assets. This reduces the risk of losses due to issuer defaults or market volatility. The prohibition of algorithmic stablecoins further protects consumers from the potential instability of such assets. With transparent reporting and disclosures, consumers can make informed decisions about their stablecoin holdings.

Financial Institutions

Banks and other financial institutions can engage in the issuance of stablecoins, provided they adhere to the regulatory framework. This opens up new business opportunities while ensuring financial stability. Financial institutions can leverage their existing infrastructure to issue stablecoins, potentially offering faster and cheaper cross-border transactions and other innovative financial services.

Regulators and Compliance Officers

Regulatory bodies and compliance officers gain a clear framework to enforce compliance and monitor stablecoin issuers. This facilitates the detection and prevention of illicit activities. The Act's detailed provisions on compliance, due diligence, and reporting provide regulators with the tools needed to maintain oversight and ensure adherence to financial crimes regulations.

Global Financial System

The Act reinforces the U.S. dollar’s position as the dominant global currency. By regulating stablecoins effectively, the U.S. can counter foreign efforts to establish alternative digital currencies and maintain its influence in the global economy. The extraterritorial application of the Act ensures that stablecoin issuers worldwide must comply with U.S. standards if they wish to operate in the U.S. market, promoting global regulatory alignment.

Why Lummis-Gillibrand Matters in the World of Regulation and Compliance

The Lummis-Gillibrand Payment Stablecoin Act is crucial for several reasons:

Establishing Standards

The Act sets clear standards for the issuance and operation of stablecoins, providing a benchmark for other countries and jurisdictions. This helps create a consistent regulatory environment globally, reducing regulatory arbitrage and fostering international cooperation in financial regulation.

Enhancing Financial Stability

By requiring one-to-one reserves and prohibiting algorithmic stablecoins, the Act reduces the risk of instability in the stablecoin market. This contributes to the overall stability of the financial system, protecting both consumers and financial institutions.

Promoting Innovation

The clear regulatory framework encourages innovation by providing a predictable environment for the development of new financial products and services. Innovators can focus on creating value without the uncertainty of unclear or inconsistent regulations.

Combating Financial Crimes

The Act's strong emphasis on compliance with AML and sanctions regulations helps prevent the use of stablecoins in illicit activities. This is essential for maintaining the integrity of the financial system and protecting national and international security.

Supporting U.S. Dollar Dominance

By regulating stablecoins effectively, the Act supports the U.S. dollar's continued dominance in the global financial system. This is crucial for maintaining the U.S.'s economic influence and leadership in global financial markets.

Conclusion

The Lummis-Gillibrand Payment Stablecoin Act is a landmark piece of legislation with the potential to reshape the digital asset landscape. By addressing key concerns such as consumer protection, illicit finance, and operational transparency, the Act provides a comprehensive framework for the issuance and regulation of stablecoins. As the digital economy continues to grow, this legislation will play a vital role in ensuring that stablecoins can be safely and effectively integrated into the financial system.

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