Regulatory scrutiny on Algorithmic Stablecoin intensifies, various types of stablecoins face risks

The U.S. government's regulation of stablecoins is increasingly tightening, especially following the collapse of the Terra/UST algorithmic stablecoin system. Recently, the U.S. House of Representatives proposed 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. Such stablecoins can typically be converted, redeemed, or repurchased at a fixed amount of currency value and rely on another digital asset from the same creator to maintain their fixed price.

Endogenous collateral stablecoins typically use collateral created by the issuer (such as governance tokens) to support the issuance of stablecoins. This mechanism can lead to a spiral increase in the price of collateral and the number of stablecoins during a bull market, while in a bear market, it may trigger liquidation and a death spiral. For regulators, this mechanism poses significant risks.

Various types of stablecoins may be affected by this legislation:

1. Over-collateralized: For example, Synthetix's sUSD uses the governance token SNX as collateral to mint stablecoins with a collateralization ratio of 400%. Although it has its own risk control mechanisms, it still fits the description of "endogenous collateral stablecoin."

2. Mechanism similar to Terra: For example, USDN of Neutrino Protocol has a mechanism similar to Terra and may face regulatory risks. However, USDD has temporarily avoided this issue due to sufficient and diverse collateral.

3. Some Algorithmic Stablecoins: For example, Frax, although the current collateralization rate is high, may still meet the definition of the legislative prohibition. Frax is a partial Algorithmic Stablecoin, and its minting process involves USDC and FXS, where FXS represents the algorithmic part.

For fiat-collateralized stablecoins, the bill provides a legal issuance channel. Banks or credit unions may issue their own stablecoins under the supervision of regulatory agencies. Issuing stablecoins without approval may face severe penalties.

Other decentralized stablecoins, such as MakerDAO's DAI and Liquity's LUSD, are primarily collateralized by decentralized assets like ETH. It is currently unclear whether they are considered legal under the recognition of the U.S. House of Representatives.

Overall, the issuance of new endogenous collateralized stablecoins may be viewed as illegal, which could impact some relatively secure stablecoin projects. For centralized stablecoins, the bill clarifies the regulatory authorities, 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 form and may be modified in future discussions. Actual implementation will take some time. With changes in the regulatory environment, the stablecoin market may usher in a new landscape.