A new stablecoin-focused bill introduced to the United States Senate could “encourage” U.S. banks to step into the stablecoin market, says global ratings firm S&P Global Ratings. 

In an April 23 research note, S&P shared that proposals outlined in the Payment Stablecoin Act — introduced to the Senate on April 17 — could encourage banks to get involved in issuing U.S. dollar-pegged stablecoins and potentially spell trouble for large non-U.S entities that issue stablecoins such as Tether.

Describing stablecoins as a potential “key pillar of financial markets,” the ratings agency looked to BlackRock’s recently launched BUIDL fund as evidence for the “efficiencies and enhanced settlement security” of stablecoins in tokenizing assets and digital bonds.

Notably, the Lummis-Gillibrand Payment Stablecoin Act proposed introducing a $10 billion issuance limit on non-bank stablecoin firms, banning “unbacked” algorithmic stablecoins, as well as requiring stablecoin issuers to hold one-to-one cash or cash-equivalent reserves.

“Assuming the bill is approved, and that relevant banking regulation follows, the new rules may offer banks a competitive advantage by limiting institutions without a banking license to a maximum issuance of $10 billion,” it said.

The ratings agency also noted that the introduction of a $10 billion issuance on non-bank firms could spell trouble for Tether which — with a market cap of $110 billion — is currently the largest U.S. Dollar-pegged stablecoin issuer on the market.

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Tether, the largest stablecoin by outstanding volume, is issued by a non-U.S. entity and therefore not a permitted payment stablecoin under the proposed bill,” S&P Global said.

“This means that U.S. entities couldn’t hold or transact in Tether, which may reduce demand while boosting U.S.-issued stablecoins.”

S&P noted that much of Tether’s transaction activity occurred primarily outside of the United States and was driven in large part by transactions in emerging markets, retail activity, and remittances.

Democrat Senator Kirsten Gillibrand said passing a regulatory framework for stablecoins was “absolutely critical to maintaining the U.S. dollar’s dominance, promoting responsible innovation, protecting consumers, and cracking down on money laundering and illicit finance,” when introducing the bill last week.

Not everyone was pleased with the proposals outlined in the bill, however.

Crypto advocacy organization Coin Center expressed concerns with the bill, saying it would be “bad policy” to ban algorithmic stablecoins, and described it as an unconstitutional act under protections of the First Amendment.

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