Brazil’s legislative process has taken a significant step toward stricter stablecoin regulation, as lawmakers in the Chamber of Deputies advanced a bill that would ban algorithmic stablecoins and require all stablecoins to be fully collateralized with segregated reserve assets. The bill, known as Project of Law 4,308/2024, received approval from the Science, Technology, and Innovation Committee, signaling a push to overhaul how digital assets are treated within the country’s legal framework.

Under the proposed legislation, stablecoins that maintain their value solely through algorithmic mechanisms including models like Ethena’s USDe and Frax would be prohibited from issuance or trading within Brazil’s borders. The draft text also introduces criminal penalties for issuing unbacked stablecoins, with offenders facing possible prison terms of up to eight years under newly defined fraud provisions.

In addition to the ban on algorithmic designs, the proposal mandates that any stablecoin issued domestically must be backed 100 percent by segregated reserve assets. Foreign stablecoin issuers, such as Tether (USDT) and Circle’s USDC, would be eligible to operate only if they obtain authorization and comply with Brazilian regulatory standards. Local exchanges would also bear the responsibility of verifying that offshore issuers meet equivalent compliance requirements or assume direct risk management obligations for offering those assets.

The bill’s advancement reflects broader concerns among Brazilian policymakers about investor protection and financial stability. Stablecoins play a dominant role in Brazil’s crypto market, reportedly accounting for the majority of transaction volume, and legislators have cited high-profile failures of past algorithmic models such as TerraUSD’s collapse as cautionary examples that warrant stricter oversight.

Market participants are watching closely as the bill moves to additional committee reviews, including the Finance and Taxation Committee and the Constitution, Justice, and Citizenship Committee, before it can reach the Senate for a full vote. If passed in its current form, the law would effectively force algorithmic stablecoin projects either to exit the Brazilian market or to redesign their token models to meet full-reserve requirements, fundamentally altering the regulatory landscape for stablecoins in one of Latin America’s largest crypto ecosystems.

For investors, this development signals a regulatory tightening trend that prioritizes traditional financial safeguards over experimental token models. The emphasis on full collateralization and strict compliance could reduce certain risks associated with unbacked stablecoins, but it may also limit liquidity options and constrain innovation within Brazil’s digital asset sector. Market sentiment around stablecoins and regulated crypto products could become more cautious as stakeholders assess how the bill’s requirements will impact trading activity and product offerings in the region.