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What will it mean if the latest US stablecoin draft is passed?

Read this article in 13 Minutes

Will UST still appear?

Original title: "The Kill Bill: What the Future Holds for Stablecoins"

Original author: easonw.eth

Original compilation: Kxp, BlockBeats

Introduction

For Crypto is no stranger to regulation of digital assets. Today, the House of Representatives released a draft bill aimed at regulating Stablecoins, which will have an impact on the issuance and mortgage of Stablecoins. As the third largest Crypto asset, Stablecoin’s market capitalization can even be on par with Ethereum at $152.8 billion.

Will this bill make Stablecoin obsolete? What does it mean for current and future stablecoins?

Content and deliberation progress of the bill

Specific content

The act establishes an institutional framework for Stablecoin, which stipulates the personnel qualifications and methods of Stablecoin issuance. The bill also mentions that Stablecoin will need to be “entirely collateralized by cash or highly liquid assets.” Although the specific scope of “highly liquid assets” is not specified in the draft, it is certain that U.S. Treasury bonds must be included. Banks and non-banks can issue stablecoins only after obtaining approval, and violators will be punished with up to 5 years in prison and a $1 million fine.

Existing Stablecoins will be given a two-year grace period to comply with the bill. At the same time, "endogenous mortgage Stablecoin" will also be classified as illegal, that is, Stablecoin cannot be mortgaged by Token in its existing ecosystem (for example, UST-LUNA type Stablecoin).

Time passed

Generally speaking, the passage of a bill will go through 5 stages: 1) introduction of the draft; 2) approval by the Senate; 3) approval by the House of Representatives; 4) approval by the President; 5) Become the law. The bill hasn't even reached the first stage, though, and hasn't been formally introduced yet. As the bill is just taking shape, it will go through several revisions before entering the first phase.

In order to let everyone understand the progress of the bill more intuitively, we have to mention the Sensational Lummis-Gillibrand The Responsible Financial Innovation Act, which was first introduced in June this year, has yet to pass the Senate after a few months. Lawmakers hold multiple hearings before casting their first vote. Since January 3, 2021, only about 4% of bills have successfully passed into law. Judging from the current situation, the possibility of passing the Stablecoin Act is quite low.

But what if it does pass? Don't worry, we'll get to that shortly.

The impact of the bill on existing Stablecoins

Centralized Stablecoin

The three largest stablecoins currently on the market are all centralized, accounting for 91% of the stablecoin market. They are: USDT ($67.97 billion), USDC ($49.52 billion) and BUSD ($21.03 billion). Not only are they an inherent property of DeFi, but most of the stablecoins held by users are measured in them. Therefore, even if the bill can be finally passed, it will not pose a threat to these major stablecoins.

These three Stablecoins are all legal currencies mortgaged by cash, national debt and other real asset combinations , so they already comply with the existing provisions of the Act and just require further approval.

FRAX

Why is FRAX so special that it needs to be discussed separately? Because they are the largest decentralized and non-overcollateralized stablecoins. With a market cap of $1.36 billion, FRAX is the fifth largest Stablecoin (and also the largest algorithmic Stablecoin).

FRAX can be partially mortgaged by USDC and FXS, while FXS is its functional token. The mortgage ratio between USDC and FXS will be adjusted according to the price (demand) of FRAX through an algorithm. Currently, FRAX's mortgage rate is 92.5%, which means that 92.5% of FRAX's collateral is USDC.

If the bill passes, FRAX is bound to come under scrutiny because it relies on an "endogenous" asset as its collateral, namely FXS. However, FXS only accounts for 7.5% of FRAX, and their founder Sam Kazemian once said, "We should increase the collateralization ratio of USDC to 100%, so that we can reduce the risk of censorship to 0."

So, the bill is basically not a problem for Frax, what about other stablecoins?

Overcollateralized Stablecoin (DAI, LUSD, MIM)

Over-collateralized Stablecoin is one of the most common types of Stablecoin in decentralized protocols, the fourth largest StablecoinDAI is using this model, and there are many others such as LUSD< So are /a> (14th largest) and MIM (12th largest). So how risky are they? I think it all depends on the definition of "highly liquid assets".

DAI is mainly collateralized by USDC, ETH, WBTC and RWA (Real World Assets). If ETH and BTC are classified as "highly liquid assets", then DAI will basically have no problems, and the only thing that may cause some trouble is RWA. Through Centrifuge, MakerDAO has lent approximately 40 million DAI, with RWA collateral including real estate, real estate loans, and shipping invoices. Although these may not be classified as "highly liquid assets", DAI will not have any risk, because RWA only accounts for a small proportion of DAI collateral.

For MIM and LUSD, the situation is very similar to DAI. LUSD is completely collateralized by ETH, while MIM is mainly collateralized by Stablecoin, ETH, wBTC and FTT, of which all may be "highly liquid assets" except FTT. Even if FTT is not classified as a highly liquid asset, MIM is likely to be safe, because it can even survive the multi-billion dollar collateral and supply collapse caused by the collapse of LUNA.

The Future of Stablecoin

Adjustments required for Stablecoins

The largest Stablecoins will require almost no changes, And more than 95% of the Stablecoin market cap is fully collateralized by fiat currency, ETH, wBTC or other Stablecoins. According to my understanding of the bill, no such stablecoins need to be adjusted. Some protocols may need to adjust their models a bit (like Frax), but I suspect this will have a big impact on the overall stablecoin market, especially in terms of innovation potential.

Stablecoin Innovation Prospect

Once the bill is passed, the innovation of the Stablecoin model will be limited, and the new algorithm Stablecoin development team will be more cautious. However, this does not mean that Stablecoin has no possibility of innovation. Protocol-level Stablecoins such as GHO and Risk-neutral stablecoins such as UXD backed by highly liquid perpetual assets can still be created. This bill may mark the end of US algorithmic Stablecoins, but it certainly does not equate to the end of Stablecoin innovation.

Conclusion

The main points are summarized as follows:

· The Stablecoin Act stipulates that US stablecoin issuers must be approved and fully collateralized by "highly liquid assets".

· This bill is still in an extremely early stage and there may be many changes before it is finalized.

· Centralized Stablecoins have largely met the requirements of this new act.

· FRAX will have to make some minor adjustments to comply with the requirements of the Act.

· Overcollateralized Stablecoins are not too problematic, but it depends on the definition of "highly liquid assets".

· The future of Stablecoin may be similar to the current situation, but the bill does restrict innovation, but does not put It's completely curbed.

For the vast majority of stablecoins, this bill may not be as bad as everyone thinks. However, it also depends on how they define certain terms, and most stablecoins may not need to make any changes at all. I hope that such laws will appear more in Crypto and Stablecoin in the future to regulate their development.