Brazil moves to ban algorithmic stablecoins like Ethena’s USDe

Brazil is moving closer to banning algorithmic stablecoins, as a congressional committee approved a bill that redefines how the country handles cryptocurrencies pegged to fiat currencies.

The Science, Technology, and Innovation Committee passed a report on Bill 4.308/2024 that prohibits the issuance or trading of stablecoins like Ethenas USDe and frax, which aim to maintain their value through code rather than collateral.

The legislation follows global concerns about the systemic risk posed by unbacked models, particularly after high-profile failures such as Terras collapse in 2022.

The bill mandates that segregated reserve assets fully back all stablecoins issued in Brazil. It also increases transparency requirements and introduces a new criminal offense for issuing unbacked stablecoins.

Those found guilty of doing so could face up to eight years in prison, in a shift toward treating such practices as financial fraud.

For stablecoins issued abroad, including Tether‘s USDT and USDC, the bill imposes new rules. These assets can only be offered by firms authorized to operate in Brazil, while exchanges must confirm that foreign issuers follow regulatory standards similar to Brazil’s.

If not, the exchange becomes responsible for managing potential risks. Stablecoins, according to data from Brazils tax authority, drive 90% of cryptocurrency volumes in the country.

The proposal still needs approval from Brazils Finance and Taxation and Constitution, Justice, and Citizenship committees before moving to the Senate and potentially becoming law.