Examining the Global Regulatory Landscape for Algorithmic Stablecoins

6 min readFeb 14, 2024

As blockchain disruption reaches mainstream finance, stable cryptocurrencies emerge as key bridges between existing monies and digital asset innovation. Their steady values protect against volatility that hinders cryptos like Bitcoin from becoming cash alternatives.

Two approaches create stability — collateral models like USDC backed by external dollar reserves, and algorithmic models relying on coded monetary policies. Recent crashes of algorithms like TerraUSD ignited global debates around their risks. How countries regulate each type splits along fascinating philosophical lines centered on software control over money creation.

We analyze nuanced stances worldwide around algorithmic stablecoins and examine real models that countries permitted or prohibited and why. The insights reveal ideological fault lines likely to shape blockchain regulation for years.

The Promise and Perils of Algorithmic Stablecoins

What are algorithmic stablecoins?

Unlike collateralized stablecoins backed by fiat reserves off-chain, algorithmic stablecoins use coded financial engineering policies that expand and contract supply responding to demand for maintaining $1 pegs.

For instance, if demand rises and tokens trade above $1, smart contracts automatically mint extra tokens to boost circulation, bringing prices lower. Codes reduce supply similarly when values drop below $1 by destroying tokens or shifting them into investment funds. Such software regulated stability avoids fiat reserves that centralized collateral models require.

When working as designed, algorithm coding imbues stabilizing power into crypto without centralized control. But software risks also create instability at scale as fatally witnessed across TerraUSD and Luna’s $40 billion collapses within one week, catalyzing industry turmoil.

This necessitates deeper dives into the promise and perils of algorithmic stablecoin models to inform wise regulation.

Global Regulatory Reactions and Philosophies

Two polarized positions dominate worldwide algorithmic stablecoin debates:

Uphold Software Sovereignty — The most liberal regulatory stance champions free financial invention rights and “code is law” outlooks. Allowing software authority over money creation enables boundless innovation deemed vital for blockchain progress even if instability results at times.
Assert State Currency Sovereignty — Conversely, the most conservative view declares money creation a sovereign right that no private software should control given societal dependency on monetary stability. Hence algorithms threatening状态 hegemony require prohibition and strict limitations.

Most global attitudes fall somewhere along this governance spectrum depending on regional economic philosophies. Let’s examine real world regulatory reactions to algorithmic stablecoin models which vividly showcase the divide.

Permitting Algorithm Currencies — South Korea Model

South Korea’s liberal legislation birthed a thriving algorithmic stablecoin industry seeking maximizing innovation benefits despite acknowledged risks. Regulatory guidelines permit algorithmic models while limiting collateralized stablecoins instead.

The landmark Special Money Law of 2022 cemented software sovereignty upholding:

Private money creation rights beyond state control
Self-correction capacity in free markets over time
Preventing algorithmic model failures from severely impacting national monetary stability

South Korea hence embraces regulatory sandboxing where algorithmic stablecoins develop with enough safeguards and oversight addressing major public risks. The nation exemplifies jurisdictions prioritizing software financial invention over stability worries or moral hazards from state approved private money creation.

Several leading algorithmic blockchain monies thrive under South Korean jurisdiction including:

Basis Cash

It expands and contracts supply using bonding curves responding to price movements away from $1 peg. When demand rises above $1.05 for sustained periods, rewards get distributed attracting arbitrage traders to sell Basis Cash bringing prices lower again.

Stably USD

This elastic stablecoin called EUSD uses fractional reserve banking principles coded into smart contracts. Collateral assets backing EUSD releases dynamically when $1 pegs drops counteracting downward spirals through automatic buoying effects.

South Korea allows such algorithmic models recognizing that open financial tinkering yields steady progress even if bumpy at times. The openness bore rich dividends during it’s crypto industry growth into a global hub. It offers a template for countries eyeing cryptocurrency leadership long term by upholding software primacy at money creation.

Banning Algorithm Currencies — New York Model

Diametrically opposed to Korea’s liberalism stands New York’s stringent BitLicense regime which completely prohibits algorithmic stablecoins deeming software unfit for monetary control. Created after early blockchain manias lead to high profile frauds, New York explicitly asserts state exclusive privileges over currency reliability and financial system security.

The BitLicense rolled out in 2015 after years of debate does permits collateralized stablecoins like Gemini Dollar or Paxos. But its strict stablecoin definitions exclude algorithmic self-adjustment models as highlighted below:

“Reserve stablecoins maintain reserves to stabilize redemption value, and do not algorithmically adjust supply. Only reserve stablecoins may receive BitLicenses.”

This restriction keeps risky software tinkering away from currency stability enjoyed by New York’s immense banking industry. Trust in money flows without technology disruptions holds sacrosanct regulatory importance.

Custodial reserves also enable better oversight over coin issuers compared to decentralized algorithmic models detached from real world entities and assets. And state currencies already solve stable purchasing power mandates reliably over centuries without fancy crypto engineering deemed unnecessary.

Such restrictive outlooks generally prevail worldwide among developed economies shielding large banking systems from disruptive innovation. Mathematics shaping currency values causes deep discomfort even if otherwise blockchain reception stays relatively welcoming.

New York’s BitLicense path showcases jurisdictions resolutely upholding state money creation authorities over free market software experiments where societal reliabilities remain paramount no matter the innovation upside.

The Nuanced Stablecoin Ideologies of Europe

European stablecoin attitudes typify fascinating middle grounds respecting both state oversight and software innovation depending on risk levels and economic impacts. Regulations display pragmatic balancing rather than the unflinching upholding of either monetary sovereignty or cryptographic sovereignty.

For instance, the EU’s Markets in Crypto-Assets (MiCA) regulations disallow pure algorithmic stablecoins from exceeding €200 million monthly transaction values or €2.5 billion total market caps reflecting conservative caps limiting national economic risks if coins collapse.

But MiCA doesn’t prohibit algorithmic models outright like New York as long as the value impacted stays low allowing contained innovation. This pragmatism leaves room for creation but acknowledges societal reliance on currency stability transcending software.

Such moderation also characterizes UK jurisprudence as seen recently. While authorities rejected a proposed algorithmic stablecoin called OneCoin citing financial stability threats, it simultaneously welcomed discussion around approving smaller algorithmic models that pose controlled risks.

Europe’s middle paths thus permit software tinkering for progress but are bounded by prudence where citizen interests reign supreme. Contrast this to South Korean liberalism allowing unbound experimentation or New York’s risk aversion shutting down new models entirely in favor of stability.

The Outlook for Global Algorithmic Stablecoin Regulations

As global debates continue unfolding, three likely regulatory trajectories emerge around algorithmic stablecoins reflecting various philosophies:

Liberal Sandboxes — Nations like Switzerland, South Korea, Singapore, Portugal and Austria may enable controlled testing environments for riskier models with oversight guardrails that isolate economy-wide impacts.
Strict Prohibitions — Jurisdictions like USA, Canada, Australia, India etc. are likely to adopt conservative bans given stability sensitivities around incumbent banking systems powering their economies.
Bounded Innovation — Pragmatic regions including the EU, UK, Thailand, Dubai etc. may permit small localized algorithmic coins but cap sizes preventing systemic risks if coins crash.

Such regulatory spectrum matches the diversity of blockchain economic outlooks globally. Countries aligned closer to permissionless innovation ethos will continue trialing algorithmic models like South Korea despite pitfalls. While stability-sensitive banking centers refuse software tampering with trusted currencies altogether.

Given the increased adoption of crypto worldwide, however, pragmatic bounds balancing both software freedom and state oversight emerge as the most likely consensus to enable mainstream stablecoin growth this decade across jurisdictions. Staking such middle grounds may nurture the upside of the financial invention without the downsides of monetary instability at societal scales.

And around such stability moderation may pivot blockchain’s delicate dance with the global financial order for years ahead.