Brazil Moves to Ban Algorithmic Stablecoins—Ethena’s USDe in the Crosshairs
Brazilian lawmakers are pushing forward with legislation that could outlaw a controversial class of crypto assets. The target? Algorithmic stablecoins—digital tokens like Ethena's USDe that rely on code, not cash reserves, to maintain their peg.
The Regulatory Squeeze
The proposed bill signals a hardening stance from one of Latin America's largest economies. It aims to clamp down on stablecoins that use algorithmic mechanisms—complex sets of smart contracts and derivative strategies—instead of holding traditional currency in a bank. Proponents of the ban cite systemic risk; if the code fails, the so-called 'stable' asset could collapse overnight.
Why Algorithmic Models Spark Fear
These models aren't backed 1:1 by dollars or euros. They use arbitrage incentives and hedging to maintain value. Critics call it a house of cards—brilliant financial engineering until the music stops. Remember Terra's UST? Brazilian regulators clearly do. This move is a preemptive strike against what they see as a latent threat to financial stability, a digital version of printing money without the press.
The Innovation vs. Protection Battle
The crypto industry fires back, arguing this stifles innovation and pushes financial experimentation offshore. They see it as heavy-handed protectionism, a move by traditional finance gatekeepers to curb a technology that bypasses their control. After all, why use a bank's slow, expensive stablecoin when code can do it cheaper and faster?
Global Ripple Effects
Brazil's move is being watched closely. It could set a precedent for other major emerging markets weighing similar crackdowns. For global crypto firms, it's another regulatory patchwork puzzle—navigate it or lose access.
Final thought: When a government moves to ban a financial instrument that hasn't even fully broken yet, you know the old guard is nervous. It's almost as if they're worried people might realize you don't need a central bank to have a currency—just some clever code and a collective agreement on its value. How terribly disruptive.
Brazil seeks to ban uncollateralized stablecoins
The bill seeks to ban the issuance of stablecoins that are not backed by reserve assets and to impose penalties on violators. The bill also mandates that foreign-issued stablecoins, such as Circle’s USDC and Tether’s USDT, comply with the jurisdiction’s legislative standards.
The collapse of algorithmic stablecoins in the industry, such as the Terra-Luna ecosystem, has sparked global concern among regulators about systemic risks. The legislation seeks to increase transparency requirements and introduces new criminal offenses for issuing unbacked stablecoins. The bill treats the issuance of algorithmic stablecoins as financial fraud, and the issuers face up to eight years in prison.
The bill also imposes new regulations on foreign stablecoins, such as Tether’s USDT and Circle’s USDC. The bill mandates that these stablecoins be offered by entities that have received regulatory approval to operate in Brazil. The bill also stated that exchanges will ensure that foreign stablecoin issuers comply with regulatory standards; failure to do so will make exchanges responsible for managing emerging risks and threats. According to data from Brazil’s tax authority, stablecoins account for 90% of the total cryptocurrency volume in the South American country.
After passing the Science, Technology, and Innovation Committee, the bill now needs the green light from Brazil’s Finance and Taxation and Constitution, Justice, and Citizenship committees before moving to the Senate and then becoming law.
U.S. banks caution that yield-bearing stablecoins could trigger bank runs
In the U.S., banking institutions and crypto firms have clashed as crypto regulations continue to unfold. A recent report highlighted that crypto firms have stepped up efforts to offer new concessions on stablecoins to win over banking institutions. These proposals include letting community banks hold reserves or issue stablecoins in a joint alliance with crypto companies.
Among the significant issues causing disagreement between crypto companies and banking institutions is the issue of stablecoin rewards. The GENIUS Act that brought clarity on stablecoins in the U.S. prohibits stablecoin issuers from issuing any reward or incentive that might be equivalent to interest earned from stablecoin holdings.
However, the regulation left a gray area, allowing third-party platforms such as Coinbase to offer rewards to incentivize holders. Banking institutions have grown increasingly concerned that stablecoin incentives may trigger bank runs by draining bank deposits.
Bank of America CEO Brian Moynihan said in mid-January that the stablecoin market will drain more than $6 trillion in bank deposits if Congress approves yield-bearing stablecoins. Moynihan drew concerns from a report by the U.S. Treasury Department that claimed the shift WOULD claim 30% to 35% of total U.S. commercial bank deposits.
However, Circle’s CEO, Jeremy Allaire, dismissed claims that interest-bearing stablecoins would trigger mass bank withdrawals and destabilize the credit market. Allaire illustrated his argument with government money market funds, which currently coexist with the banking industry and have not destabilized the financial sector despite the same concerns that emerged during their development. The U.S. money market funds hold more than $7 trillion in assets as of January 2026, yet banks still receive new deposits and make significant gains from the credit market.
In Europe, banks have teamed up to develop their own stablecoin. A recent Cryptopolitan report highlighted that Spain’s second-largest bank, BBVA, joined the Qivalis alliance, which aims to establish a stablecoin compliant with MiCA regulations. The banks involved in this project include Banca Sella, BNP Paribas, CaixaBank, Danske Bank, DekaBank, DZ BANK, ING, KBC, Raiffeisen Bank International, SEB, and UniCredit.
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