The growing interest around algorithmic stablecoins, the cryptocurrency without any traditional backing and which is expected to maintain its value on its own, has drawn mixed reactions from both investors and policymakers. These assets depend heavily on smart contracts and algorithms and are usually linked to the US Dollar. However, the Fall 2025 US policies pose a risk to several algorithmic coins. Let’s try and break down the issues caused due to this ambiguity.
Table of contents
What are algorithmic stablecoins?
Algorithmic stablecoins lack the required reserve of assets like cash or gold but try to hold their value constant, usually around a dollar. Instead, they manage their coin supply to ensure the price stabilizes. Smart contracts, self-executing snippets of code on a blockchain, get rid of the expensive intermediaries of cryptocurrency by stunningly automating almost everything. Specifically, the smart contracts for algorithmic stablecoins mint coins when the price is low and burn them when the price is high. Look no further for an example than Terra’s UST, which crashed and burned in 2022, triggering a multibillion-dollar loss for countless investors.
Regulatory Landscape for 2025
As part of upcoming regulatory arrangements, the U.S is poised to unveil the GENIUS Act, alongside the Digital Asset Market Structure and Investor Protection Act. The primary focus of the GENIUS Act is on paying stablecoins such as USDC, which are essentially backed by reserves or collateral. On the other hand, the Digital Asset Market Structure Act seeks to define and differentiate digital assets- currencies, securities, commodities, and collectibles- to be administered by different regulators.
The difficulty comes when trying to place algorithmic stablecoins within this taxonomy. In their current state, there is no reasonable categorization for them, which creates a loophole of bewildering proportions.
Why Are They a Regulatory Blind Spot?
The provisions of the GENIUS Act are surgically tailored to asset backed stablecoins, which means algorithmic counterparts have a harder alignment. There are hints of policies that concern these coins, but nothing in the way of actual laws exists. At this point, algorithmic stablecoins are, to put it diplomatically, a puzzle for regulators.
The same predicament afflicts the Market Structure Act. It remains to be elucidated whether algorithmic stablecoins should be classified as: the Digital Asset Market Structure Act encounters classification issues when assessing different types of stablecoins. A significant question arises: Should algorithmic stablecoins be categorized as:
- Currency: like payment stablecoins, they have very reliable valuation methods, except they do not have reserves that back them up.
- Securities: if they are treated as investment contracts that offer profits. This classification complicates their regulatory treatment and increases scrutiny from regulators.
- Commodities: like Bitcoin, can be seen as a form of decentralized asset. However, the commodities depend on algorithms for stability, which makes such categorization more difficult.
The wave of regulatory caution is added to because of the tremendous failures noticed in the crypto space particularly with the collapse of Terra/Luna. This puts regulators in a bind. Should they crack down on these volatile assets and set harsh regulations, or should they take a backseat and let these risky assets operate freely?
Consequences for Investors
Investors who want to invest in algorithmic stablecoins should tread very carefully. With no oversight and regulation defined, assets like these can just get banned or altered at any instance; especially given its notorious past. With the failure of projects like Terra/Luna we can see how algorithmic stablecoins can be seen as the most volatile investment option.
While waiting for more regulatory clarity to emerge, it would be prudent to observe the progress made on the GENIUS Act and other proposals that come after it. It may be wise for investors to stay aligned with more established assets like USDC, which have clearer backing and regulations, at least for the time being.
Takeaway: Adopting a Wait-and-See Strategy
Risks and innovation in cryptocurrency can be perfectly highlighted by algorithmic stablecoins. Investors issuing these stablecoins face many hurdles because there are no rules. The discussion concerning these assets seems to be continuous with traces of regulation, but no clear course as of now.
All things considered, remaining knowledge driven is of the essence. At the moment, these investors stand to lose because, algorithmic stablecoins are highly uncertain in what they will do in this crypto world’s infancy.
