S&P Global Ratings suggests that the Lummis-Gillibrand Payment Stablecoin Act, recently introduced to the Senate, could motivate major U.S. banks to explore opportunities in the stablecoin sector. This bill, unveiled on April 17, aims to regulate stablecoins and could impact non-U.S. entities like Tether.

Stablecoins, viewed as a potential cornerstone of financial markets, have gained attention for their efficiency and improved settlement security, as evidenced by BlackRock's BUIDL fund, which utilizes stablecoins to tokenize assets and digital bonds.

The proposed Payment Stablecoin Act includes measures such as a $10 billion issuance limit on non-bank stablecoin firms and the prohibition of "unbacked" algorithmic stablecoins. It also mandates that stablecoin issuers maintain one-to-one cash or cash-equivalent reserves.

If approved, the bill's regulations could offer U.S. banks a competitive edge by restricting non-bank institutions to a maximum issuance of $10 billion. This may pose challenges for Tether, currently the largest issuer of U.S. Dollar-pegged stablecoins with a market cap of $110 billion, as it is issued by a non-U.S. entity.

As Tether wouldn't qualify as a permitted payment stablecoin under the proposed legislation, U.S. entities would be unable to hold or transact in Tether, potentially reducing its demand while bolstering U.S.-issued stablecoins.

S&P Global highlights that Tether's transaction activity, primarily outside the U.S., is driven by transactions in emerging markets, retail activity, and remittances.

Democratic Senator Kirsten Gillibrand emphasized the importance of establishing a regulatory framework for stablecoins to preserve the dominance of the U.S. dollar, foster responsible innovation, protect consumers, and combat money laundering and illicit finance.

However, not all stakeholders are in favor of the bill. Coin Center, a crypto advocacy organization, voiced concerns, arguing that banning algorithmic stablecoins would be detrimental and potentially unconstitutional under the First Amendment's protections.