Last Updated on September 21, 2022 by Bitfinsider

A piece of stablecoin regulation legislation being developed in the House would outlaw coins like TerraUSD, the algorithmic stablecoin that crashed earlier this year, for two years.

According to a copy of the bill, it would be unlawful to issue or produce new “endogenously collateralized stablecoins.” Stablecoins that are advertised as having a constant exchange rate and that entirely depend on the value of another digital asset produced by the same developer to maintain their fixed price would fall under the criteria.

Through the use of an algorithm and trading in a sister token called Luna, TerraUSD, commonly known as UST, was created to maintain a 1-to-1 peg to the US dollar. When UST plummeted in May, that experiment failed miserably, causing billions of dollars in damages and reigniting interest in stablecoins among regulators.

In accordance with the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Securities and Exchange Commission (SEC), the draft law would require Treasury to conduct a study on tokens similar to Terra.

Maxine Waters, the chairwoman of the House Financial Services Committee, and Patrick McHenry, the ranking member, have been attempting to come to terms on stablecoin legislation, though sources familiar with the talks say it’s unclear whether the Republican McHenry has approved the most recent draft. Before the plan is published in its final form, its terms may yet alter.

The law would permit banks and nonbanks to produce stablecoins in addition to resolving what happened with Terra. Bank issuers would approach their typical federal authorities, like the OCC, for approval. The proposed legislation would mandate that the Fed create a procedure for deciding applications from nonbank issuers.

Additionally, the law would maintain the function of state regulators. The bill would permit nonbank stablecoin issuers that have received state approval to operate as long as they registered with the Fed within 180 days of that approval.