A recently introduced bill by US Senators Cynthia Lummis and Kirsten Gillibrand has sparked controversy in the crypto industry due to a proposed ban on algorithmic stablecoins. The Payment Stablecoin Act, as it is known, has been criticized by former Blockchain Association member Jake Chervinsky, who has labeled it as "deeply flawed." Chervinsky argues that the bill only allows centralized and custodial stablecoins, which he believes goes against his testimony to Congress in 2023, where he advocated for the regulation of custodial stablecoins and avoiding regulation of algorithmic stablecoins until further study.

Aaron Day, Chairman and CEO of the Daylight Freedom Foundation and a Brownstone Institute fellow, has also criticized the proposed ban on algorithmic stablecoins. He argues that the bill would benefit banks rather than crypto, as banks' involvement in stablecoins could pave the way for central bank digital currencies (CBDCs). However, the Federal Reserve has repeatedly stated that it has no intention of issuing a CBDC due to the Fed Now system.

FOX Business reporter Eleanor Terrett has reported that the Lummis-Gillibrand bill initially did not include such harsh restrictions. Lawmakers aimed to reach "moderate positions on ... contentious issues," including the bill's proposed restrictions on algorithmic stablecoins. However, sources have not revealed why lawmakers shifted their initial perspective, and all affected parties are "not particularly excited about the bill" in its current state.

The bill explicitly prohibits unbacked algorithmic stablecoins, but it does not describe any incident to justify the proposed ban. The collapse of Terraform Labs' algorithmic stablecoin TerraUSD in May 2022, which wiped $80 billion in value from the crypto market, has likely played a role in the lawmakers' decision to include the prohibition in the legislation.

The bill only permits depository institutions and non-depository trust institutions to issue stablecoins and does not set out a clear path to compliance for existing stablecoin firms. The bill also aims to prevent the illegal use of stablecoins and creates separate federal and state regulatory regimes, among other specific requirements.

In summary, the proposed ban on algorithmic stablecoins in the Lummis-Gillibrand Payment Stablecoin Act has been met with criticism from the crypto industry. The bill's restrictions on algorithmic stablecoins have been criticized for being too harsh and benefiting banks rather than crypto.

The bill's supporters argue that it is necessary to prevent the illegal use of stablecoins and create separate federal and state regulatory regimes. However, the bill's opponents argue that it does not provide a clear path to compliance for existing stablecoin firms and may stifle innovation in the crypto industry.