Brazil's new law bans algorithmic stablecoins! USDe and Frax may be prohibited due to lack of collateral reserves

Brazilian Congress pushes new law to strictly ban unsecured and algorithmic stablecoins, requiring 100% physical reserves and introducing criminal penalties, reshaping the highly dependent stablecoin market order.

Congress Committee approves new bill, strictly prohibiting algorithmic stablecoins

The Brazilian government is accelerating its tightening of digital asset regulations. Recently, the Brazilian Congress Science, Technology, and Innovation Committee officially approved Bill No. 4.308/2024, which aims to overhaul the operation mechanism of fiat-pegged stablecoins within Brazil.

The bill explicitly states that issuing or trading any “algorithmic stablecoins maintained through computer code and market strategies” is prohibited, with primary targets including Ethena’s USDe and Frax.

Regulators believe that digital assets lacking physical backing pose high instability to the financial system. Therefore, the bill requires all stablecoins operating in Brazil to be backed by 100% physical reserves, such as cash or government bonds.

According to the bill, stablecoin issuers must ensure their reserve assets are fully segregated from company assets and submit detailed management reports to the government to demonstrate transparency and security of reserves. The bill’s definition of stablecoins is limited to those fully collateralized with assets. The push for this regulation is largely driven by the 2022 Terra-Luna algorithmic stablecoin collapse. At that time, the event wiped out hundreds of billions of dollars globally, causing severe losses for countless investors, prompting regulators worldwide to reconsider the safety of uncollateralized models.

Currently, after passing the committee review, the bill will be forwarded to the Finance and Taxation Committee and the Constitution, Justice, and Citizens Committee for further deliberation. If approved by the Senate, it will become law and have a substantial binding effect on the market.

Criminal penalties and compliance obligations, illegal issuance can lead to up to 8 years in prison

In addition to restrictions on technical architecture, the most attention-grabbing aspect of Bill No. 4.308/2024 is its introduction of severe criminal penalties. The bill defines the issuance of unsecured or non-compliant stablecoins as “financial fraud,” with violators facing up to 8 years in prison. This penalty clause is considered one of the strongest regulations in global stablecoin oversight to date. It reflects Brazil’s attempt to deter potential fraud and systemic risks by imposing high illegal costs, thereby protecting local users’ assets.

For foreign stablecoins currently dominant in the global market, such as Tether’s $USDT and Circle’s $USDC, the new law also sets clear compliance thresholds. These foreign stablecoins must operate through authorized entities in Brazil and meet local regulatory standards to provide services within the country.

More importantly, Brazilian authorities extend compliance responsibilities to local cryptocurrency exchanges. The bill stipulates that exchanges must verify whether foreign issuers meet Brazilian legal standards. If issuers fail to comply, exchanges will bear legal responsibility for managing related risks. This regulation undoubtedly increases operational burdens and risk management costs for local service providers, forcing exchanges to conduct more rigorous due diligence before listing assets.

Stablecoins dominate trading volume, regulatory shift impacts 90% of the crypto market

The Brazilian government’s decision to adopt a tough stance at this time is largely due to the critical role stablecoins play in the country’s cryptocurrency market. According to data from Brazil’s tax authorities, stablecoins account for over 90% of the country’s total cryptocurrency trading volume. Brazilian users generally see stablecoins as essential tools for hedging, cross-border payments, and daily asset transfers, with monthly transaction volumes estimated between $6 billion and $8 billion. This high level of market participation means that the collapse of any single stablecoin could trigger nationwide financial turmoil, which is why lawmakers insist that stablecoins must be legalized and operated transparently.

If the bill is ultimately passed, many currently popular algorithmic stablecoin projects will face tough choices: either overhaul their underlying design to meet full collateralization requirements or withdraw entirely from the Brazilian market. For investors and traders in Brazil, this could mean fewer available assets, but the safety of trading environments is expected to significantly improve.

Additionally, the Central Bank of Brazil and tax authorities are considering further levying financial transaction taxes (IOF) on stablecoin trading and implementing stricter reporting systems, aiming to incorporate these digital assets into traditional financial oversight to prevent money laundering and tax evasion.

Global regulatory tensions, Brazil’s legislative path resonating with international trends

Brazil’s regulatory trend is not an isolated phenomenon but aligns with global concerns over stablecoins. In the United States, conflicts are erupting between traditional banking systems and the cryptocurrency industry. Bank of America CEO Brian Moynihan has publicly warned that if the U.S. Congress allows the issuance of “yield-bearing stablecoins,” such products could trigger severe bank runs and potentially withdraw up to $6 trillion from commercial bank deposits.

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US Bank CEO warns: Stablecoins could drain $6 trillion in deposits, impacting bank lending capacity

The U.S. Department of the Treasury’s report also indicates that yield-bearing stablecoins could take away 30% to 35% of total bank deposits. While Circle CEO Jeremy Allaire opposes this, arguing that such concerns are exaggerated and citing the coexistence of money market funds and banks for years without systemic collapse, governments remain wary of digital currencies eroding traditional bank deposits.

Meanwhile, European banking institutions are proactively responding. Major financial firms including Spain’s BBVA, France’s BNP Paribas, and the Netherlands’ ING have formed the Qivalis alliance to develop stablecoins compliant with the EU’s Markets in Crypto-Assets Regulation (MiCA). Brazil’s current legislative direction clearly draws lessons from international experiences, choosing a path similar to the EU’s “high transparency and full collateralization” approach.