Original | Odaily Planet Daily (@OdailyChina)
On March 13, the U.S. Senate Banking Committee passed the stablecoin regulation bill with a vote of 18 to 6, bringing a milestone regulatory framework to this rapidly developing industry. The market rejoiced, and the compliance prospects for mainstream stablecoins like USDT and USDC became clearer. However, a "hidden detail" has received little discussion—the bill sets a two-year ban on stablecoins that "rely solely on self-created digital assets as collateral (such as algorithmic stablecoins)" and requires the Treasury to study their risks.
Is it because algorithmic stablecoins have been overshadowed since the UST collapse in 2022, or is the market only focusing on good news? This clause is worth examining closely.
What are stablecoins that rely on "self-created" digital assets as collateral?
The term "self-created" in the bill is clearly defined yet somewhat ambiguous. Literally, it refers to digital assets created by the stablecoin issuer within its own system to support the value of the stablecoin, rather than relying on external assets like the U.S. dollar, government bonds, or gold. In other words, these stablecoins do not have traditional financial assets backing them but instead attempt to maintain price stability through algorithmic mechanisms and their own tokens to adjust supply and demand. However, the boundaries of the term "rely solely" have not been clearly defined, leaving room for controversy regarding the scope of regulation.
Classic stablecoins, such as USDC or USDT, rely on U.S. dollar reserves and are subject to transparent audits, allowing them to maintain a 1:1 redemption capability even during severe market fluctuations. In contrast, "self-created" stablecoins depend entirely on internal design for stability, lacking a safety net of external assets. The collapse of UST is a typical case; when a large number of holders sold UST, the price of the LUNA token plummeted, causing the stablecoin to lose its support and triggering a "death spiral." In this model, algorithmic stablecoins not only struggle to withstand market shocks but may also become sources of systemic risk in the market.
The ambiguous definition of "self-created" has become a focal point of controversy. If a stablecoin relies on both external assets and self-created tokens, does it fall under the ban? This question directly affects the implementation of subsequent regulations and brings uncertainty to the development of other stablecoins.
Which stablecoin projects may be affected?
The current stablecoin market can be divided into three categories: fiat-backed, over-collateralized, and algorithmic stablecoins, each with different design logic and risk characteristics, directly determining their fate under the bill.
Fiat-backed and collateralized: Safe Zone
USDT and USDC: Relying on U.S. dollar and short-term government bond reserves, with high transparency, the asset reserve and audit requirements of the bill pave the way for their compliant development.
MakerDAO's DAI: Generated through over-collateralization with external assets like ETH and wBTC, with reserve ratios typically between 150%-300%. The MKR token is used only for governance and not as core support, facing no regulatory pressure in the short term.
Ethena's USDe: The main collateral for USDe consists of Ethereum assets like stETH and ETH. The governance token ENA is not directly used as collateral for USDe, serving only for protocol governance and incentives. The generation mechanism of USDe leans more towards collateralized, not falling under the category of "relying solely on self-created digital assets." However, the stability mechanism of USDe involves derivatives hedging, which may be viewed by regulators as a "non-traditional" stablecoin. If regulation focuses on "derivative risks" or "non-traditional asset support," USDe's "delta-neutral strategy" (stability mechanism) may face additional scrutiny.
Algorithmic stablecoins: Target of the ban
Algorithmic stablecoins, due to their "self-created" nature, have become the focal point of the ban. They rely on internal tokens and algorithmic mechanisms, with minimal involvement of external assets, concentrating risk. Here are a few past typical cases:
Terra's UST: Adjusted value through LUNA, which is a self-created token of Terra, relying entirely on the ecosystem. The collapse in 2022 evaporated $40 billion and dragged down multiple DeFi protocols.
Basis Cash (BAC): An early algorithmic stablecoin that used BAC and BAS (self-created tokens) to maintain balance, quickly lost its footing under market volatility and has long faded from view.
Fei Protocol (FEI): Relied on FEI and TRIBE (self-created tokens) for adjustment, losing market trust due to decoupling issues after its launch in 2021, leading to a sharp decline in popularity.
The common feature of these projects is that their value support relies entirely on self-created tokens, with external assets almost absent. Once market confidence wavers, collapse becomes almost inevitable. Supporters of algorithmic stablecoins once shouted the slogan of "decentralized future," but the reality is that they have low risk resistance, making them a key focus of regulation.
However, there exists a gray area: many stablecoins do not rely entirely on "self-created" assets but adopt a hybrid model. For example:
Frax (FRAX): Partially relies on USDC (external assets) and partially adjusts through FXS (self-created tokens). If the definition of "self-created" is too strict, the role of FXS may limit it; if lenient, it may escape the ban.
Ampleforth (AMPL): Achieves purchasing power stability through supply and demand adjustments, not relying on traditional collateral, making it closer to an elastic currency, possibly not falling within the bill's definition of stablecoins.
In other words, while the bill targets stablecoins that "rely on self-created digital assets as collateral," the term "rely solely" does not clearly define the boundaries, leaving the fate of these hybrid projects uncertain. If the Treasury's research defines "self-created" too broadly, hybrid model projects may be inadvertently harmed; if too narrowly, it may miss risk points. This uncertainty directly affects market expectations for related projects.
Why did the regulatory authorities establish this ban?
The bill's ban on "self-created" assets reflects both concerns about reality and hopes for the future.
First, systemic risk is the core concern. The UST collapse was not only a $40 billion nightmare for retail investors but also triggered a chain reaction in the DeFi market, even raising alarms in traditional finance. The closed-loop design of algorithmic stablecoins makes them prone to losing control under extreme conditions, potentially becoming a "ticking time bomb" in the crypto market. Regulatory authorities clearly hope to curb this potential threat through the ban.
Second, the lack of transparency exacerbates regulatory difficulties. Self-created tokens like LUNA or FEI have values that are difficult to verify through external markets, and their fund operations resemble a black box, contrasting sharply with the public ledgers of USDC. This opacity not only leaves regulators at a loss but also buries potential fraud risks.
Third, investor protection is a real need. Ordinary users find it difficult to understand the complex mechanisms of algorithmic stablecoins, often mistakenly believing they are as safe as USDT. After the UST collapse, retail investors suffered significant losses, highlighting the urgency of protecting them from high-risk innovations.
Finally, the stability of monetary policy cannot be ignored. The large-scale application of stablecoins may impact U.S. dollar monetary policy. If a significant amount of funds flow into unregulated algorithmic stablecoins, which lack sufficient external asset support, market instability may interfere with the Federal Reserve's monetary control.
However, the two-year ban does not completely negate the concept but carries an exploratory meaning. The ambiguity of "self-created" is a point of contention but also leaves room for adjustment. The Treasury's research will clarify the boundaries and determine which projects are genuinely restricted. At the same time, these two years serve as a "trial period" for the DeFi community. If more robust solutions can be introduced—such as Frax's hybrid model, which buffers risks through external assets, or the development of entirely new pressure-resistant mechanisms—the regulatory stance may soften. Conversely, if they continue to adhere to the "self-created" closed loop, algorithmic stablecoins may face stricter constraints once the ban expires.
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