Algorithmic Stablecoin May Face U.S. Regulatory Ban

With the collapse of the Terra/UST Algorithmic Stablecoin system, the U.S. government has intensified its regulation of 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 issuing or creating new "algorithmic stablecoins" will be considered illegal. This definition covers stablecoins that can be converted, redeemed, or repurchased at a fixed monetary value, relying on another digital asset created by the same issuer to maintain their fixed price.

"Endogenous collateral stablecoin" usually refers to the issuance of stablecoins using collateral created by the issuer (such as governance tokens). This mechanism may cause a spiral increase in the price of collateral and the quantity of stablecoins during a bull market, while triggering liquidation and death spirals during a bear market. Regulators believe this mechanism carries significant risks.

The following are several types of stablecoins that may be affected:

1. Over-collateralized: For example, Synthetix's sUSD uses the governance token SNX as collateral to mint stablecoins with a collateralization rate of 400%.

2. Mechanism similar to Terra: For example, the USDN of the Neutrino Protocol has a mechanism similar to Terra, and its price has been persistently below 1 dollar.

3. Some Algorithmic Stablecoins: For example, Frax, although its current collateralization rate is as high as 92.5%, its mechanism may conform to the definition of the regulatory ban.

It is worth noting that some originally similar stablecoins, such as USDD, may have avoided this issue due to the sufficiency and diversity of their collateral.

For fiat-collateralized stablecoins, the bill provides a legal issuance channel. Banks or credit unions can issue their own stablecoins under the supervision of regulatory agencies. Non-bank issuers must apply for approval through the process established by the Federal Reserve.

Other decentralized stablecoins, such as MakerDAO's DAI and Liquity's LUSD, mainly use decentralized assets like ETH as collateral, which may not fall under the category of endogenous collateral stablecoins. However, it is currently unclear whether they are considered legal under the determination of the U.S. House of Representatives.

Overall, the bill could impact many relatively safe decentralized stablecoins, such as Frax and sUSD. For centralized stablecoins, the bill clarifies the regulatory agencies, and it may become more common for banks to issue their own stablecoins.

It is important to note that the bill is currently still in draft stage and may be discussed as early as next week, with the content potentially subject to change. Actual implementation will still take some time. As regulatory policies become clearer, the stablecoin market may usher in new changes and adjustments.