Press Release

Lummis, Gillibrand Introduce Bipartisan Landmark Legislation To Create Regulatory Framework For Stablecoins

Apr 17, 2024

Today, U.S. Senators Kirsten Gillibrand (D-NY), member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY), member of the Senate Banking Committee, introduced the bipartisan Lummis-Gillibrand Payment Stablecoin Act, landmark bipartisan legislation that creates a clear regulatory framework for payment stablecoins that will protect consumers, enable innovation and promote U.S. dollar dominance while preserving the dual banking system. 

“Passing a regulatory framework for stablecoins is absolutely critical to maintaining the U.S. dollar’s dominance, promoting responsible innovation, protecting consumers and cracking down on money laundering and illicit finance,” said Senator Gillibrand. “The bipartisan Lummis-Gillibrand Payment Stablecoin Act preserves the dual banking system and gives both federal and state agencies roles in chartering and enforcement. It protects consumers by mandating one-to-one reserves, prohibiting algorithmic stablecoins, and requiring stablecoin issuers to comply with U.S. anti-money laundering and sanctions rules. To draft the strongest bill possible, our offices worked closely with the relevant federal and state agencies and I’m confident this legislation can earn the necessary support in the Senate and the House.”

“In order to meet the growing demand for our ever-evolving financial industry, we need to craft legislation that strikes the careful balance of establishing a clear and workable framework for stablecoins while protecting consumers,” said Senator Lummis. “Together, Senator Gillibrand and I worked to preserve our dual banking system and install guardrails that protect consumers and prevent illicit finance while ensuring we don’t derail innovation. Passing this bipartisan solution is critical to maintaining the U.S. dollar’s dominance and making certain the U.S. remains the world leader in financial innovation.”

The Lummis-Gillibrand Payment Stablecoin Act

  1. Protects consumers by requiring stablecoin issuers to maintain one-to-one reserves and prohibiting unbacked, algorithmic stablecoins. 
  2. Prevents illicit or unauthorized use of stablecoins by issuers and users. 
  3. Creates federal and state regulatory regimes for stablecoin issuers that preserves the dual banking system. 

Leading officials in U.S. financial regulation, including Federal Reserve Chair Jerome PowellTreasury Secretary Janet Yellen, and Deputy Treasury Secretary Wally Adeyemo, have recently called for Congress to regulate stablecoins. The bill received multiple rounds of technical assistance from representatives of the Board of Governors of the Federal Reserve System, Department of the Treasury, the National Economic Council, the New York Department of Financial Services, Wyoming Division of Banking and the Federal Deposit Insurance Corporation.

The full text of the bill is available here, in addition to a section-by-section overview and a one-pager.

The Lummis-Gillibrand Payment Stablecoin Act:

Protects consumers

  • For depository institutions (banks) and non-banks (trust companies) with activities unrelated to stablecoins, subsidiaries must be created for the sole function of stablecoin issuance.
  • Stablecoin issuers will be held to strict capital and reserve requirements. Issuers will need to hold one-to-one reserve requirements, ensuring that stablecoins issued are fully backed by cash and cash-equivalents.  
  • U.S.-approved issuers may only issue dollar-backed stablecoins, preventing algorithmic stablecoins from entering the market.  
  • Allows for FDIC conservatorship and resolution should a company experience insolvency.
    • A detailed receivership regime is established under the FDIC for all payment stablecoin issuers, including order of priority, validity of claims and classification of payment stablecoins as customer assets, not assets of the issuer. 

Encourages responsible innovation

  • Provides a clear, comprehensive regulatory framework for dollar-backed stablecoins, a new financial technology that has several promising capabilities. Stablecoins:
    • Give users the ability to send a payment anywhere in the world nearly-instantly. Legacy systems can take up to 7-10 days via wire transfer.
    • Are digitally native, which allow innovators to build new programs and apps that will give consumers more control and flexibility to use their money.
    • Can have lower fees than current options for sending money, especially for international remittances.

Prevents illicit finance

  • The need to pass legislation that would harmonize global rules for dollar-denominated stablecoins is urgent because other countries (e.g., Japan, Singapore, Hong Kong, UAE) are currently writing rules for the dollar. It would also encourage the development of compliant, U.S.-issued stablecoins. 
  • Unregulated, offshore stablecoins are a significant source of digital illicit finance.
    • The UN Office on Drugs and Crime estimated that over a one-year period between 2022 and 2023, offshore stablecoins were used for $17 billion in transactions connected to illicit financing, illegal commodity trades, and criminal activity. 
    • Legislation with strong penalties for issuing a USD-denominated stablecoin without conforming to U.S. financial crimes rules would immediately cripple a source of funds for Hamas, Hezbollah, Chinese fentanyl traffickers, North Korea, and Russian sanctions evaders.  

Protects American interests

  • Passing payment stablecoin legislation will support the dollar as the medium of digital exchange. In 2021, the President’s Working Group on Financial Markets recognized the promise of well-regulated stablecoins to improve the speed and efficiency of the existing financial system while promoting dollar dominance.
  • Codifying standards for compliant U.S.-issued stablecoins will counter foreign ambitions to establish alternative settlement systems and enshrine American values and the dollar as the base currency for the $4.5 trillion digital economy. 
  • Will create healthy competition and a race to create compliant stablecoins among American companies including banks, payments, and financial technology companies.  Malign actors will no longer have the option to use unregulated foreign stablecoins, and consumers will benefit by knowing they are using safe, compliant U.S. payment instruments. 

Addresses custody

  • Imposes comprehensive third-party risk management on third-party contracted service providers (with an exemption for self-custody wallet providers).
  • Grants the Federal Reserve supervisory authority over service providers, except when the service provider is already supervised by another federal or state financial regulator. 
  • Provides that state trust companies which are stablecoin issuers can be the legal custodian of record for payment stablecoins and reserves, but must use a federal/state chartered-depository institution as subcustodian to hold the assets. 
  • Provides that depository institutions that are stablecoin issuers can perform all custodial services in relation to payment stablecoins, including being the legal custodian and actually holding the assets. 
  • Provides that customer payment stablecoins and reserves relating to those stablecoins must be strictly segregated from the proprietary assets of the issuer and that rehypothecation–using collateral that a firm does not own to help finance assets–is prohibited. 

Preserves the dual banking system

  • The bill preserves the dual banking system as it is today.
  • States’ current authority over non-depository trust companies is acknowledged and preserved (no OCC trust charter is authorized to issue stablecoins), a state trust company path is created and authorized, and the Federal Reserve retains its role as the guardian of money creation in the U.S. 
  • The bill authorizes state trust companies to create and issue payment stablecoins up to $10 billion, with federal or state depository institutions authorized to issue any amount. For state trust companies, there is required transition planning at $9 billion and an expedited conversation process. 
  • The legislation grants the Federal Reserve or state financial regulators the ability to take independent, but coordinated, enforcement action against a depository institution issuer, but the Federal Reserve and State must act jointly for trust companies below $10 billion. 

In addition to this bill, Senators Lummis and Gillibrand are co-authors of the Lummis-Gillibrand Responsible Financial Innovation Act, landmark legislation that would create a comprehensive regulatory framework for crypto assets.