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US regulators might ban TerraUSD and other algorithmic stablecoins for up to two years

US regulators might ban TerraUSD and other algorithmic stablecoins for up to two years

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Interest in cryptocurrencies has been growing in the US for years, and it certainly skyrocketed in 2020 and 2021, when the bull run sent digital coins sky high. All the while, the pressure on US lawmakers to regulate the crypto market has been growing. Now, leaders of the House Financial Services Committee are negotiating the terms of a new bill, as the window for action is getting narrower as the midterm elections approach.

The new crypto bill is heavily focused on stablecoins

This latest draft is particularly interesting and influential because it proposed a complete ban on algorithmic stablecoins, one of which is TerraUSD (UST). The bill proposes a two-year ban on tokens while regulators conduct an investigation into so-called “endogenously secured” cryptos.

The term “endogenously” refers to something that is produced in an organism or system, and this term works well with this type of stablecoin, such as TerraUSD, because its creators relied on algorithms that minted and burned LUNA tokens to maintain the value of TerraUSD. The value of the stablecoin was always supposed to be $1, and the algorithm would maintain this balance by reacting to price changes.

Of course, TerraUSD and Luna crashed in May 2022 with several very negative consequences. Not only did it mean the loss of huge sums of money for its investors, as both cryptocurrencies became virtually worthless – but the event also triggered another bearish wave across the industry, further pushing the prices of other coins and tokens down.

Cryptosceptics got yet another example of how risky cryptos can be, and the pressure on lawmakers and regulators grew even more, with many demanding that they come up with regulations and laws to protect investors and regulate the industry. Ultimately, this led to the drafting of the latest bill.

The final vote will take place next week

Prior to the new bill, previous proposals required stablecoin issuers to maintain liquid assets for all stablecoins to match every token in circulation. It also defined the types of assets that can be used to back said stablecoins. However, this new draft goes into even more detail and provides guidance for financial institutions looking to issue stablecoins in cooperation with a network of regulators.

Not only that, but the network must now include state-level regulatory bodies, and stablecoin issuers have 180 days to obtain federal approval before they can proceed with their projects.

What comes next remains to be seen. The bill will be voted on sometime next week, when it will be decided whether it will become law or not.

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