Brazil Pushes Jail Terms for Unbacked Stablecoins as U.S. Reward Debate Deepens

Algorithmic stablecoins face stricter scrutiny as U.S. debates rewards, reserves, and growing risks to bank deposits.

Brazil is proposing a measure that mandates all stablecoins issued in Brazil to be fully backed by separate reserve assets. Additionally, the pitch seeks to increase operational transparency and also introduce criminal offenses for parties that launch unbacked stablecoins. Debate over stablecoin design is also playing out in the United States, where banks and crypto firms remain divided. 

Crypto Bill Introduces Prison Terms for Unbacked Stablecoin Issuers

Brazil’s Science, Technology, and Innovation Committee approved a report tied to Bill 4.308/2024. As reported, the pitch represents a key step toward banning algorithmic stablecoins. 

Specifically, the bill targets tokens that rely on code and market mechanics rather than reserves to keep a fixed value. This means assets similar to Ethena’s USDe and frax would no longer be traded or issued in the country.

Following Terra’s collapse a few years ago, most industry participants have flagged algorithmic stablecoins. For context, algorithmic stablecoins are digital coins that maintain a 1:1 peg with a fiat currency such as the dollar. But one distinctive feature of these coins is their lack of collateral backing.

Lawmakers now view such designs as a financial risk rather than a technical experiment. The proposed law requires every stablecoin issued in Brazil to hold segregated reserve assets that fully match token supply.

Notably, the pitch also raises disclosure standards and creates a criminal offense for issuing unbacked stablecoins. In fact, violations could lead to prison sentences of up to eight years. Even so, officials argue that offenders should be slammed with tougher penalties. According to them, stablecoins dominate local crypto activity and therefore warrant more stringent penalties.

Stablecoins play a central role in Brazil’s market, accounting for about 90% of crypto transaction volume based on tax authority data. As a result, the proposal also introduces rules for foreign-issued stablecoins, including USDT and USDC. 

Only licensed firms would be allowed to offer such assets. At the same time, exchanges would need to verify that issuers meet similar standards.

Lawmakers in Brazil and U.S. Take Diverging Paths on Oversight

Key requirements outlined in the proposal include:

• Full backing of all locally issued stablecoins with segregated reserves.
• Criminal penalties for issuing or trading unbacked stablecoins.
• Licensing obligations for foreign fiat-pegged asset providers.
• Compliance checks required from Brazilian exchanges.
• Risk liability placed on platforms offering non-compliant assets.

For possible approval, the measure must still pass several legislative approvals before becoming law.

On U.S. soil, banking institutions and crypto firms continue to clash over how such assets should operate. Recent discussions show crypto companies offering concessions, including shared reserve models with community banks.

Disagreement centers on stablecoin rewards. Under provisions of the GENIUS Act, issuers cannot offer returns resembling interest. Gray areas remain, however, allowing platforms like Coinbase to provide incentives through third-party programs.

Bank of America CEO Brian Moynihan warned that yield-bearing stablecoins could drain over $6 trillion from bank deposits. Comments referenced a U.S. As per Treasury estimates, banks could lose about 35% of commercial deposits.

Jeremy Allaire opposes that view, arguing that similar fears once surrounded money market funds. Those funds now hold more than $7 trillion without destabilizing banks.

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