Senate Bill Risks Innovation and Free Speech with Stablecoin Ban

Sens. Cynthia Lummis and Kirsten Gillibrand this week introduced a bill to create a regulatory framework for stablecoins, which is a laudable endeavor. Unfortunately that bill also includes a complete ban on what it calls “algorithmic payment stablecoins.” Doing so would be not just bad policy but unconstitutional as well.

Stablecoins like Terra, which are endogenously collateralized with a sister token created and promoted by the same issuer, have been labeled “algorithmic” and have rightly drawn serious criticism. From our perspective, the Terra-Luna scheme was likely a security and thus already subject to SEC jurisdiction. The government failed to prevent Terra’s implosion not because there was a lack of legislation, but because there was a lack of enforcement of existing law. Therefore, it may make sense to require issuers of products like Terra to register with the SEC and make appropriate disclosures (which for all practical purposes would make their use as a stablecoin infeasible), but an outright ban on a particular business model is unnecessary and anti-innovation. If one can comply with the securities laws, one should be able to bring a product to market.

More importantly, there can be “algorithmic stablecoins” that (unlike Terra) are fully decentralized, with no issuers or promoters making any promises. In such cases a ban on “algorithmic stablecoins” is essentially a ban on publishing code, which would violate free speech rights. In the United States, inventing and publishing software and algorithms, even commercial software for business purposes and for profit, is protected by the First Amendment. Banning people from publishing code and algorithms is a clear prior restraint on protected speech and is unconstitutional unless the government can show a compelling interest and narrow tailoring. Given the availability of more reasonable approaches than a full-on ban, the Lummis-Gillibrand approach is not narrowly tailored.

Coin Center doesn’t typically engage in stablecoin-related policy because usually such legislation is aimed at regulating financial products issued and managed by centralized firms—albeit on top of blockchains. As we are primarily focused on the civil liberties of individuals to write, publish, and run code, and to do so privately, such bills typically don’t implicate First and Fourth Amendment concerns. The Lummis-Gillibrand Payment Stablecoin Act, however, does so directly by making it “unlawful for any person to engage in the business of issuing, creating, or originating an algorithmic payment stablecoin.” That is, publishing code.

Last year the “Clarity for Payment Stablecoins Act” was introduced in the House and it too sought to address the Terra/“algorithmic stablecoin” issue. It would do so by implementing a two-year moratorium on new endogenously collateralized stablecoins like Terra and directing the Treasury Department and the SEC to study the issue during that time. While we don’t think such a moratorium is necessary because we believe such products are likely already covered by securities law, the approach is not unreasonable because

1. it is not an outright permanent ban, but a two-year moratorium,
2. it only prohibits future activity and does not affect existing projects, and
3. it does not prohibit speech, only the issuance of tokens that the “originator has represented will be converted, redeemed, or repurchased for a fixed amount of monetary value”.

We hope Senators Lummis and Gillibrand will reconsider their approach toward “algorithmic stablecoins” and look forward to continuing to engage with them to get a reasonable policy outcome.