Brazil Moves to Ban Stablecoins Not Backed by Real Assets

The Brazilian government is advancing a law that would ban algorithmic stablecoins like Ethena’s USDe, as lawmakers push to place strict rules on digital money. This week, the Science, Technology, and Innovation Committee approved Bill 4.308/2024, which explains how stablecoins can be issued, traded, and monitored in the country.

This bill aims at stablecoins that do not hold real reserves, such as cash or government bonds. Algorithmic stablecoins, like Ethena’s USDe and Frax, rely on computer code and market strategies to keep their value instead of having money or assets behind them.

Lawmakers cite user protection risks

The new law would require that all stablecoins issued in Brazil must be fully backed by reserve assets that are kept separately from the issuer’s other funds.

In addition, companies issuing stablecoins must show exactly how their reserves are stored and managed. Not complying would be seen as a serious crime. Those found guilty could face prison sentences of up to eight years, marking one of the toughest penalties proposed for stablecoin activity globally.

Officials say this is meant to prevent fraud and protect the financial system from failures like the 2022 collapse of the Terra-Luna algorithmic stablecoin, which erased billions of dollars in value and left many users with heavy losses.

Rules for backed stablecoins

Foreign stablecoins such as Tether’s USDT and Circle’s USDC would still be allowed, but only if they are offered by companies authorized to operate in Brazil. Crypto exchanges would be required to verify that foreign issuers meet Brazilian regulatory standards.

If an issuer fails to comply, the exchange could become responsible for managing the resulting risks. According to Brazil’s tax authority, stablecoins account for about 90% of all cryptocurrency trading volume in the country. The lawmakers want to make sure that this high-usage market is operated legally. 

Following the approval by the Science, Technology, and Innovation Committee, the bill now moves to the Finance and Taxation Committee and the Constitution, Justice, and Citizenship Committee. If approved, the bill will go to the Senate for final consideration before becoming law.

International stablecoin debate

The debate over stablecoins is also playing out internationally. In the United States, banking leaders have warned that yield-bearing stablecoins could pull deposits out of banks. 

Bank of America CEO Brian Moynihan has said these products could drain more than $6 trillion from bank deposits if they are allowed. U.S. Treasury Department reports also warned that stablecoins paying rewards could take 30% to 35% of total commercial bank deposits. 

In contrast, Circle CEO Jeremy Allaire has rejected those concerns, arguing that similar fears did not materialize with money market funds, which now hold over $7 trillion in assets. In 

In Europe, banks are joining forces to create their own stablecoins that follow EU MiCA rules. Spain’s BBVA is part of the Qivalis alliance, which also includes Banca Sella, BNP Paribas, CaixaBank, Danske Bank, DekaBank, DZ BANK, ING, KBC, Raiffeisen Bank International, SEB, and UniCredit.

Broader context

In Brazil, stablecoins make up most of the cryptocurrency trading in the country, with about 90% of all crypto volume coming from these tokens. People use them to buy, sell, and move money quickly.

Algorithmic stablecoins can suddenly lose value, which can cost users a lot and create problems for the financial system. That’s why the law asks for government approval and clear reports on reserves, to make the market safer from fraud.

Also Read: Brazil’s Wealthy Sidestep Bitcoin Despite Global Shift