Algorithmic Stablecoin Faces Regulatory Risks in the US

With the collapse of the Terra/UST Algorithmic Stablecoin system, U.S. regulators have intensified their focus on stablecoins. Recently, the U.S. House of Representatives introduced a stablecoin bill aimed at banning Algorithmic Stablecoins similar to TerraUSD (UST).

The draft bill clearly states that the issuance or creation of new "endogenous collateral stablecoins" will be considered illegal. This definition encompasses stablecoins that can be converted, redeemed, or repurchased at a fixed monetary value, relying on another digital asset from the same creator to maintain its fixed price.

"Endogenous collateral stablecoin" typically refers to a mechanism for issuing stablecoins using collateral created by the issuer (such as governance tokens). This model may lead to a spiral increase in the price of collateral and the quantity of stablecoins during a bull market, while it could trigger a death spiral due to liquidation in a bear market. Regulators believe this mechanism carries significant risks.

According to the bill description, some over-collateralized stablecoins may face regulatory risks. For example, certain projects use their own governance tokens as collateral to mint stablecoins in an over-collateralized manner. Although these projects have their own risk control mechanisms, they still meet the definition of "endogenous collateral stablecoins."

Stablecoin projects similar to the Terra mechanism may also be affected. Certain protocols, although superficially issuing stablecoins and collateral from different entities, may still be regarded as meeting the standards for the ban judgment due to their operational methods and value maintenance mechanisms.

Some algorithmic stablecoins, even with a high current collateralization ratio and sufficient liquidity, may face regulatory risks. These types of stablecoins typically adopt a model that is partially algorithmic and partially collateralized, and in certain extreme situations, they may completely rely on governance tokens to maintain price stability.

For fiat-backed stablecoins, the bill provides a legal issuance channel. Banks or credit unions can issue their own stablecoins under the supervision of regulatory agencies. The bill also guides the Federal Reserve to establish a process to review applications from non-bank issuers. Issuing stablecoins without approval may face severe penalties.

Currently, some stablecoin projects that are collateralized by decentralized assets do not seem to fall under the category of algorithmic stablecoins, but their legitimacy still needs to be further clarified.

Overall, this bill could impact many existing decentralized stablecoin projects, including some that are considered relatively safe. At the same time, it provides a clear regulatory framework for the issuance of centralized stablecoins. It is worth noting that the bill is currently still in the draft stage and may undergo modifications in subsequent discussions, with its final enactment requiring some time.