In a move to protect investors, Japan’s parliament has passed a bill classifying stablecoins as digital money that must be connected to the nation’s currency, yen, or another legal tender.
The legal framework, which is expected to be rolled out in a year, also stipulates that holders have the right to redeem stablecoins at face value. Per the announcement:
“The legal definition effectively means stablecoins can only be issued by licensed banks, registered money transfer agents and trust companies. The legislation doesn’t address existing asset-backed stablecoins from overseas issuers like Tether or their algorithmic counterparts.”
It seems it’s a race against time for global governments to put up guardrails in the stablecoin arena following the shocking collapse of TerraUSD (UST), which triggered the loss of approximately $60 billion.
Things started going haywire after the algorithmic UST stablecoin on the Terra network experienced a de-pegging from its US Dollar benchmark.
Some experts like Ransu Salovaara, the CEO of DeFi platform Likvidi, stated that the algorithmic nature of UST could have triggered the crash.
This explains why governments are looking at cracking the whip in the stablecoin space because tokens in this sector have a market value of around $161 billion, according to CoinGecko.
Tether (USDT) tops the stablecoin list, followed by Circle’s USD Coin (USDC) and Binance USD (BUSD).
Is it the end of the algorithmic stablecoin era?
Speaking to CNBC during the World Economic Forum in Davos, Reeve Collins noted that it was both unfortunate and not a surprise that money was lost through the algorithmic UST stablecoin because smart people were trying to peg it to the dollar.
The Tether co-founder added:
“A lot of people pulled out their money in the last few months because they realized that it wasn’t sustainable. So that crash kind of had a cascade effect. And it will probably be the end of most algorithmic stablecoins.”
With algorithmic-based stablecoins being at the experimental stage, volatility becomes inevitable.
Anshul Dhir, the co-founder, and COO of EasyFi Network pointed out:
“Experimental algorithmic stable coins are volatile, and it is believed that it will take some time to find a good algorithmic stable coin. Over a period of time, such programmable money should be possible, which ultimately is the end goal of decentralized finance.”
Therefore, time will tell how things turn out for algorithmic stablecoins moving forward.
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