US proposes regulation of stablecoins
According to a source today, a new bill is introducing a two-year ban on “ stablecoins endogenously mortgaged”.
The US House of Representatives stablecoin bill regulates the issuance or creation of new stablecoins that mimic the functionality and features of UST is illegal. UST is the algorithmic stablecoin of Terra lost its dollar peg in May, wiping out billions of dollars in value in an irreversible free fall to zero. More specifically, the bill would ban any marketed stablecoins that can be converted, redeemed or redeemed for a fixed monetary amount, as well as any that rely solely on the value of a digital asset. other cryptocurrencies from the same creator to maintain a fixed price.
In addition to the moratorium on algorithmic stablecoins, the draft law also requires the US Treasury Department to study tokens like Terra in consultation with the United States Federal Reserve (Fed), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation of the United States, the United States Securities and Exchange Commission (U.S.SEC).
While the bill primarily focuses on restricting “unsupported” stablecoins from entering circulation to protect users, it also provides guidance on how to regulate fiat-pegged assets more generally. The bill would allow both banks and non-banks to issue stablecoins. However, bank issuers will need approval from federal regulators like the OCC. For non-bank issuers, the law directs the Fed to establish a process for making adoption decisions.
The US House of Representatives' stablecoin bill is the first legislation aimed at regulating the rapidly growing stablecoin market. According to data from CoinGecko, the total market capitalization of stablecoins is over $153 billion. The market size increased by around 600% as the broader crypto ecosystem developed over the past 2 years.
While the majority of stablecoins in circulation are backed by US dollars or equivalent, many dollar-pegged tokens use new methods to maintain value. Although the bill is still in the process of being drafted, many users worry its wording could include some legitimate stablecoin projects in the 2-year ban.
Which stablecoins could be affected?
While the wording of the draft is still subject to change, the current version provides some clues as to the direction in which regulators intend to take it. The term “endogenously collateralized stablecoin” is very broad and can refer to any token backed or partially backed by another token from the same issuer.
For example, UST is collateralized with only native tokens LUNA of Terra should almost certainly face a 2-year ban if it's still active so far. However, the bill does not yet address the case where dollar-pegged asset generation protocols use a mixture of tokens both endogenous (created by the same issuer) and exogenous (created by different parties). other release).
On the other hand, previous failed stablecoin projects like Iron Finance don't quite fit the definition of being collateralized only by endogenous tokens. The protocol used the original rate of 75% USDC and 25% TITAN token for minting stablecoin IRON. However, as history has shown, when IRON fell to zero in June 2021, this collateral method still posed a significant risk to investors.
Other protocols like Frax Finance have so far successfully used a hybrid collateral approach. Frax, which stands for “segmentation algorithm”, uses the rate of change of USDC and a free-floating Frax Shares token for minting and collateralizing dollar-pegged FRAX. This method of collateral seems much more flexible than previous projects like TerraUSD or Iron Finance. However, whether the new stablecoin bill realizes this distinction remains to be seen.
Another concern regarding the new bill is how it might affect MakerDAO's stablecoin DAI. Unlike IRON and FRAX, DAI is fully collateralized with exogenous assets, mainly USDC and ETH. Therefore, the bill's ban would not involve DAI. However, like all non-bank stablecoin issuers, if the new bill is passed into law, the Maker protocol will likely need to register with US regulators to continue servicing. user service in this country.
As the US government's first foray into stablecoin regulation, the bill looks rather conservative. Consistent with a previous comment by US Treasury Secretary Janet Yellen, regulators are moving towards stablecoin issuers that are more in line with traditional finance. For most stablecoin issuers, this is not a problem. However, as always, one mile wrong goes a mile, so the final version of the bill will need to be released before its potential impact becomes apparent.