This year, the entire world saw stablecoins abandon their association with the word “stable.” The entire cryptocurrency market had to bear the brunt of the fallout. An array of stablecoins were seen temporarily losing their peg due to Terra’s algorithmic TerraUSD [UST]. While governments around the world are keeping an eye on things, the US government appears to be focusing on algorithmic stablecoins.
On September 20, the US government noted in a recent draft bill the creation and issuance of “endogenously collateralized stablecoins” would be illegal.
Those well-educated on crypto understand that Terra doesn't represent all stablecoins, Celsius wasn't DeFi, 3AC had nothing to do with the technology, etc.
But as in all things, it's a lot harder to engage with those nuances than to simply say "crypto bad, regulate it to death."
— Jake Chervinsky (@jchervinsky) September 19, 2022
It should be noted, however, that existing providers were given two years to spruce up their models by selecting different ways to collateralize their offerings. Terra’s dramatic demise occurred several months ago, but the after effects of its demise are still felt today.
The United States Treasury is required to comply with the proposed legislation, in addition to conducting dedicated research on algorithmic stablecoins and consulting with the Federal Reserve, the Securities and Exchange Commission [SEC], the Federal Deposit Insurance Corporation [FDIC], and the Office of the Comptroller of the Currency [OCC].
Previous draft of the legislation limited the types of assets that could be used to back stablecoins and mandated that stablecoin issuers keep 1:1 liquid reserves for all stablecoins in circulation.
The most recent draft, according to Bloomberg, is currently being reviewed by ranking member Rep. Patrick McHenry (R-NC) and committee chair Rep. Maxine Waters (D-CA), goes even further.
Are Algorithmic Stablecoins on their way out?
The community was well prepared for the extensive involvement of governments following the demise of Terra’s UST. As a result, the community did not appear surprised by the ban on algorithmic stablecoins.
However, it should be noted that before the bill’s final version is released, the above clauses may change. Bloomberg reports that the panel in charge of it could vote as soon as next week.
Additionally, it has been reported that Maxine Waters, the chairwoman of the House Financial Services Committee, and Patrick McHenry, the ranking member, have been collaborating and negotiating stablecoin legislation.
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