On March 13, the U.S. Senate Banking Committee passed the stablecoin regulatory bill with a vote of 18 to 6, bringing a milestone regulatory framework to the rapidly developing industry. The market celebrated as the compliance prospects for major stablecoins like USDT and USDC became clearer. However, a “hidden detail” has been largely overlooked — the bill imposes a two-year ban on “stablecoins relying solely on self-created digital assets as collateral (such as algorithmic stablecoins)” and requires the Treasury Department to study their risks. Is this due to the shadow cast over algorithmic stablecoins since the 2022 collapse of UST, or does the market simply focus on the good news? The implications of this clause deserve further investigation.
Background: Stablecoin Brief History: A New Financial System Built on the Shoulders of Tradition
On March 13, the U.S. Senate Banking Committee passed the stablecoin regulatory bill with a vote of 18 to 6, bringing a milestone regulatory framework to the rapidly developing industry. The market celebrated as the compliance prospects for major stablecoins like USDT and USDC became clearer. However, a “hidden detail” has been largely overlooked — the bill imposes a two-year ban on “stablecoins relying solely on self-created digital assets as collateral (such as algorithmic stablecoins)” and requires the Treasury Department to study their risks. Is this due to the shadow cast over algorithmic stablecoins since the 2022 collapse of UST, or does the market simply focus on the good news? The implications of this clause deserve further investigation.
What are “self-created” digital asset-collateralized stablecoins?
The term “self-created” in the bill points to something specific but somewhat vague. 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 such as USD, government bonds, or gold. In other words, these stablecoins are not backed by traditional financial assets but instead rely on algorithmic mechanisms and internal tokens to adjust supply and demand to try to maintain price stability. However, the boundaries of the term “relying solely” have not been clearly defined, raising contentious issues regarding the scope of regulation.
Traditional stablecoins, such as USDC and USDT, rely on USD reserves and are accompanied by transparent audits, allowing them to maintain a 1:1 redemption ability even during market volatility. On the other hand, “self-created” stablecoins rely entirely on internal design, without the safety net of external assets. The collapse of UST serves as a classic example: when a large number of holders sold UST, the value of the LUNA token plummeted, causing the stablecoin to lose support and triggering a “death spiral.” In this model, algorithmic stablecoins not only struggle to withstand market shocks but may also become a source of systemic risk in the market.
The vague definition of “self-created” has become a point of contention. If a stablecoin relies on both external assets and self-created tokens, does it fall under the ban? This issue directly affects the implementation of subsequent regulations and creates uncertainty for other stablecoins.
Which stablecoin projects might be affected?
The current stablecoin market can be divided into three categories: fiat-backed, over-collateralized, and algorithmic stablecoins. Their design logic and risk characteristics differ, directly determining their fate under the bill.
Fiat-backed and Collateralized: Safe Zone
- USDT and USDC: These stablecoins rely on USD and short-term government bond reserves, with high transparency. The bill’s asset reserve and auditing requirements pave the way for their compliant development.
- MakerDAO’s DAI: Generated through over-collateralization using ETH, wBTC, and other external assets, with reserve rates ranging from 150% to 300%. The MKR token is used solely for governance, not core support, and there is no immediate regulatory pressure.
- Ethena’s USDe: USDe’s main collateral is Ethereum assets like stETH and ETH. The governance token ENA is not directly used as collateral for USDe but only for protocol governance and incentives. USDe’s generation mechanism leans toward collateralized models, thus not falling under “sole reliance on self-created digital assets.” However, its stability mechanism involves derivative hedging, which may be considered by regulators as “non-traditional” stablecoin. If regulators focus on “derivatives risks” or “non-traditional asset support,” USDe’s “delta-neutral strategy” (stability mechanism) may face additional scrutiny.
Algorithmic Stablecoins: The Target of the Ban
Algorithmic stablecoins, due to their “self-created” nature, have become the main target of the ban. They rely on internal tokens and algorithmic mechanisms, with minimal involvement of external assets, concentrating risk. Here are some typical past cases:
- Terra’s UST: Adjusted value through LUNA, with LUNA as Terra’s self-created token, entirely dependent on the ecosystem. Its collapse in 2022 wiped out $40 billion and dragged down multiple DeFi protocols.
- Basis Cash (BAC): An early algorithmic stablecoin that relied on BAC and BAS (self-created tokens) to maintain balance. It quickly failed under market volatility and has faded from view.
- Fei Protocol (FEI): Relied on FEI and TRIBE (self-created tokens) for adjustment. After launching in 2021, it lost market trust due to de-pegging issues and quickly declined in popularity.
The common feature of these projects is that their value support relies entirely on self-created tokens, with little to no external assets. Once market confidence wavers, collapse becomes nearly inevitable. Proponents of algorithmic stablecoins once championed a “decentralized future,” but the reality is they have low risk-resilience and have become a focal point for regulators.
However, there is a gray area: many stablecoins do not rely entirely on “self-created” assets but instead use hybrid models. 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 could restrict its operation; if the definition is more lenient, it may escape the ban.
- Ampleforth (AMPL): Achieves purchasing power stability through supply and demand adjustments, not relying on traditional collateral. It is more akin to an elastic currency and may not be included in the bill’s stablecoin definition.
In other words, while the bill targets “self-created digital asset-collateralized” stablecoins, the term “solely reliant” has not been clearly defined, leaving the fate of these hybrid projects uncertain. If the Treasury Department defines “self-created” too broadly, hybrid projects may be inadvertently harmed. If it’s too narrow, some risks may be overlooked. This uncertainty directly impacts market expectations for these projects.
Why did regulators impose this ban?
The ban on “self-created” digital assets stems from both concerns about the present and hopes for the future.
- Systemic Risk: The collapse of UST was not just a $40 billion nightmare for retail investors, but also triggered a chain reaction in the DeFi market, even catching the attention of 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. Regulators clearly hope to curb this potential threat with the ban.
- Lack of Transparency: Self-created tokens like LUNA or FEI are difficult to verify through external markets, and their financial operations resemble a black box, contrasting sharply with the public ledgers of USDC. This lack of transparency not only makes regulation difficult but also creates potential for fraud.
- Investor Protection: Ordinary users often struggle to understand the complex mechanisms of algorithmic stablecoins and may mistakenly assume they are as safe as USDT. After the collapse of UST, retail investors suffered heavy losses, highlighting the urgency of protecting users from high-risk innovations.
- Stability of Monetary Policy: The widespread use of stablecoins could potentially affect U.S. monetary policy. If large amounts of money flow into unregulated algorithmic stablecoins that lack sufficient external asset backing, the resulting market instability could interfere with the Federal Reserve’s monetary controls.
However, the two-year ban is not a complete rejection but rather an exploratory measure. Although the vagueness of “self-created” is a point of controversy, it also leaves room for adjustment. The Treasury Department’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 — such as Frax’s hybrid model, which buffers risk with external assets, or the development of entirely new pressure-resistant mechanisms — are introduced, regulators may soften their stance. Conversely, if the focus remains on a “self-created” closed-loop, algorithmic stablecoins may face stricter regulations after the ban expires.
