Original | Odaily Planet Daily ( @OdailyChina )
Author | Dingdang ( @XiaMiPP )
On March 13, the U.S. Senate Banking Committee passed the Stablecoin Regulation Act by a vote of 18 to 6, bringing a milestone regulatory framework to this rapidly growing industry. The market cheered, and the compliance prospects of mainstream stablecoins such as USDT and USDC became clearer. However, there is a hidden detail that few people discuss - 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 Department to study its risks.
Is it because algorithmic stablecoins have been overshadowed since the collapse of UST in 2022, or is the market only paying attention to good news? The reason behind this clause is worth a closer look.
What is a “self-created” digital asset-collateralized stablecoin?
The term self-created is clear but vague in the bill. Literally, it refers to digital assets created by the issuer of stablecoins within their own system to support the value of stablecoins, rather than relying on external assets such as the US dollar, treasury bonds or gold. In other words, these stablecoins are not backed by traditional financial assets, but instead try to maintain price stability by regulating supply and demand through algorithmic mechanisms and their own tokens. However, the boundaries of the term relying only on are not clearly defined, which has planted a hole in the dispute over the scope of regulatory application.
The most classic stablecoins, such as USDC or USDT, rely on US dollar reserves and are supplemented by transparent audits, and can maintain a 1:1 redemption capability even when the market fluctuates violently. However, self-created stablecoins are different. Their stability depends entirely on internal design and lacks the safety net of external assets. The collapse of UST is a typical case. When a large number of holders sold UST, the price of LUNA tokens plummeted, causing the stablecoin to lose support and trigger a death spiral. In this model, algorithmic stablecoins are not only unable to withstand market shocks, but may also become the source of systemic risks in the market.
The vague definition of self-created has become a controversial focus. If a stablecoin relies on both external assets and self-created tokens, is it also within the scope of the ban? This issue directly affects the implementation of subsequent supervision and also brings development uncertainty to 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 its own different design logic and risk characteristics, which directly determines their fate in the bill.
Fiat-backed and collateralized: the safe zone
USDT and USDC: Relying on US dollars and short-term Treasury bond reserves, they have high transparency, and the asset reserve and audit requirements of the bill pave the way for their compliance development.
MakerDAOs DAI: It is generated through over-collateralization of external assets such as ETH and wBTC, with a reserve rate of 150%-300%. MKR tokens are only used for governance rather than core support, and there is no regulatory pressure in the short term.
Ethenas USDe: USDes main collateral is Ethereum assets such as stETH and ETH. The governance token ENA is not directly used as USDes collateral, but is only used for protocol governance and incentives. USDes generation mechanism is more collateral-oriented and does not fall into the category of relying solely on self-created digital assets. However, USDes stabilization mechanism involves derivative hedging and may be regarded as a non-traditional stablecoin by regulators. If the regulator focuses on derivative risks or non-traditional asset support, USDes delta neutral strategy (stabilization mechanism) may be subject to additional scrutiny.
Algorithmic stablecoins: the bullseye of the ban
Algorithmic stablecoins have become the focus of the ban due to their self-created nature. They rely on internal tokens and algorithmic mechanisms, with very low external asset participation and concentrated risks. Here are a few typical cases in the past:
Terras UST : Regulates value through LUNA, which is Terras own token and completely dependent on the ecosystem. The 2022 crash evaporated $40 billion and dragged down multiple DeFi protocols.
Basis Cash (BAC) : An early algorithmic stablecoin that uses BAC and BAS (self-created tokens) to maintain balance. It quickly lost ground under market fluctuations and the project has long faded from view.
Fei Protocol (FEI) : Relying on FEI and TRIBE (self-created token) for regulation, it lost market trust due to decoupling issues after its launch in 2021, and its popularity dropped sharply.
The common characteristics of these projects are that their value support is completely dependent on self-created tokens, and external assets are almost absent. Once market confidence is shaken, collapse is almost inevitable. Supporters of algorithmic stablecoins once shouted the slogan of decentralized future, but the reality is that their risk resistance is low and they have become the focus of regulatory attention.
However, there is a gray area: many stablecoins do not rely entirely on “self-created” assets, but adopt a hybrid model. For example:
Frax (FRAX) : Partially dependent on USDC (external assets), partly regulated by FXS (self-created tokens). If the definition of self-created is too strict, the role of FXS may limit it; if it is loose, it is expected to be spared.
Ampleforth (AMPL) : Achieves purchasing power stability through supply and demand adjustments, does not rely on traditional collateral, is closer to elastic currency, and may not be within the definition of stablecoin in the bill.
In other words, although the bill points to self-created digital asset collateralized stablecoins, the term relying solely on does not clearly define the boundaries, leaving the fate of these hybrid projects undecided. If the Ministry of Finances research defines self-created too broadly, hybrid model projects may be accidentally hurt; if it is too narrow, it may miss risk points. This uncertainty directly affects the markets expectations for related projects.
Why did regulators establish this ban?
The bill imposes a ban on self-creation, which reflects both concerns about reality and expectations for the future.
First, systemic risk is the core concern. The collapse of UST is not only a $40 billion nightmare for retail investors, but also triggers a chain reaction in the DeFi market and even arouses vigilance in traditional finance. The closed-loop design of algorithmic stablecoins makes it extremely easy to get out of control under extreme conditions and may become a time bomb in the crypto market. Regulators obviously hope to curb this potential threat through a ban.
Secondly, the lack of transparency exacerbates the difficulty of supervision. The value of self-created tokens such as LUNA or FEI is difficult to verify through the external market, and the operation of funds is like a black box, which is in sharp contrast to the public ledger of USDC. This opacity not only makes it difficult for supervision to start, but also lays the hidden dangers for potential fraud.
Third, investor protection is a real need. Ordinary users find it difficult to understand the complex mechanisms of algorithmic stablecoins and often mistakenly believe that they are as safe as USDT. After the collapse of UST, retail investors suffered heavy losses, highlighting the urgency of protecting retail investors from high-risk innovations.
Finally, the stability of monetary policy cannot be ignored. The large-scale application of stablecoins may have an impact on the US dollar monetary policy. If a large amount of funds flow into unregulated algorithmic stablecoins, and these stablecoins lack sufficient external asset support, market instability may interfere with the Federal Reserves monetary regulation.
However, the two-year ban is not a complete negation, but rather an exploratory one. Although the ambiguity of self-creation is a controversial point, it also leaves room for adjustment. The Ministry of Finances research will clarify the boundaries and determine which projects are truly restricted. At the same time, these two years are a trial period for the DeFi community. If a more robust solution can be introduced - such as Fraxs hybrid model, risk buffering through external assets, or the development of a new stress-resistant mechanism - the regulatory attitude may soften. On the contrary, if the self-creation closed loop is still adhered to, algorithmic stablecoins may face more stringent constraints after the ban expires.
