New US bill seeks to ban UST-like algorithmic stablecoins for 2 years

Earth’s multibillion-dollar crash in May was a game changer for digital asset regulations, and many jurisdictions have tightened control over the industry since then. The US Congress is the latest and, with a new bill, would ban “endogenously guaranteed” stablecoins such as TerraUSD (UST) for the next two years.

The bill was introduced earlier this year and was due to be voted on in the House of Representatives two months ago. However, lawmakers continued negotiations, with Representative Maxine Waters (D-CA) saying in July that they would return after the August break.

Bloomberg now reports that the bill has been amended to include algorithmic stablecoins. According to the latest version of the bill, it would be illegal to create and issue “endogenously guaranteed stablecoins”. This would cut stablecoins that rely entirely on the value of another digital asset created by the same issuer to maintain their anchor.

UST was a prime example of an endogenous collateralized stablecoin. To stay pegged at $ 1 it depended on the economic incentives of the market: arbitrage traders burned LUNA and coined UST depending on whether it was higher or lower than $ 1.

This economic incentive mechanism faced its first real test in May, when the FSO was depegging and, instead of incentivizing arbitrage traders, it led to a bank run and the whole project failed. Project founder Do Kwon is now a fugitive who may soon be on Interpol’s red notice.

US lawmakers want to make sure such a collapse doesn’t happen again, at least not in the next couple of years. Maxine, who chairs the House Financial Services Commission, worked with Representative Patrick McHenry (R-NC), a ranking member of the committee, to reach agreement on the legislation. It is still unclear whether McHenry approved the latest version of the bill, Bloomberg says, which means more changes could be made before the bill is voted on.

Maxine is a strong supporter of stricter regulations, stating earlier this year that “investigations have shown that many of these so-called stablecoins are not, in fact, fully backed by reserve assets.” If left unchecked, they could threaten the financial stability of the United States.

It is also unclear when lawmakers will put the bill to a vote. However, sources tell the outlet it may be as early as next week. If it goes to October before it gets voted on, it may have to be sidelined for several weeks as lawmakers focus on the upcoming November mid-term elections.

No more free rides for stablecoin issuers

The era of stablecoin issuers having the uncontrolled freedom to do what they want, including illegal price support for certain tokens, is firmly behind us. In addition to banning algorithmic stablecoins, the draft law will curb other stablecoin issuers.

Although non-bank entities can still issue stablecoins, they would have to go through a much more rigorous process before they can create new projects. This includes the need to apply for a license from their state regulators and, if approved, they should get Federal Reserve clearance.

These issuers will also not be able to combine user funds, whether stablecoins or cash, with the company’s assets. The bill says this will better protect users in the event of bankruptcy and there has been a good number this year.

The US Congress is not alone in trying to eliminate algorithmic stablecoins. A leaked draft of EU legislation on cryptocurrency markets (MiCA) reveals that European lawmakers have also learned their lesson from the collapse of the FSO.

The draft, seen by a newspaper, wants these stablecoins to be brought under the supervision of regulators regardless of “how the issuer intends to design the crypto asset, including the mechanism to maintain a stable value”.

When it was first drafted, MiCA did not include algorithmic stablecoins, but again it was in 2020 and UST had just launched.

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