US House Committee proposes a 2-year ban on DAI, USDD and similar stablecoins

• The US House Committee on Financial Services suggested banning algorithmic stablecoins for two years, citing the TerraUSD collapse.
• Issuance or creation of new “endogenously collateralized stablecoins” would also be prohibited should the bill pass.
• The ban on algorithmic stablecoins could impact the few existing coins such as DAI and Frax, pushing this category out of competition from the market.

The Terra ecosystem collapse was the harbinger of one of the worst crashes in the history of crypto. The market has still not been able to recover completely from this drawdown, and the struggle is still evident in the overall market cap’s attempt at rising above $1 trillion. 

To prevent another such occurrence, the US The House of Representatives Financial Services Committee (FSC) has come up with a bill that could place stringent regulations on a certain kind of stablecoin.

Terra induces new stablecoin regulation

Since the collapse and subsequent market crash were triggered by Terra’s algorithmic stablecoin TerraUSD’s (UST) de-pegging, financial regulators seem to have grown concerned about the stability of these assets.

Focusing on algorithmic stablecoins, the US House FSC proposed a bill to regulate these stablecoins to the extent of placing a two-year ban on similar assets.

The ban would also extend to any similar upcoming assets making it illegal to issue or create any “endogenously collateralized stablecoins”. In addition to the ban, the new bill would also allow banks and nonbanks to issue stablecoins. 

This would be done with the approval from regulators such as the OCC (Office of the Comptroller of the Currency) for the former and establishing a process for the latter.

This bill would, however, require a study from the Treasury in consultation with the Federal Reserve, OCC, Federal Deposit Insurance Corporation (FDIC), as well as the Securities and Exchange Commission (SEC).

The impact on algorithmic stablecoins

As it is, such kinds of assets have a minimal market share. DAI, for example, despite being the fourth biggest stablecoin in the market, only has a circulation of $6.87 billion.

Although the collapse of UST did not bear any harmful impact on the likes of DAI, USDD, Frax, etc., the new draft legislation could.

Furthermore, a two-year ban could completely push this category out of the competition in the market, leaving stablecoins to fiat-backed, commodity-backed and crypto-backed assets.

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