Sonic Labs Scraps Plans for Algorithmic USD Stablecoin

• Sonic Labs has called off the launch of an algorithmic USD stablecoin because of the new regulations in the U.S.
• The current proposed STABLE Act includes a ban on algorithmic stablecoins for two years.
• Andre Cronje agreed with the decision and mentioned previous disappointments such as TerraUSD.

Sonic Labs has officially withdrawn its plans to release a USD-denominated algorithmic stablecoin less than a week after first hinting at the project. This comes as more regulatory heat intensifies in the United States, with lawmakers seeking to pass legislation that can potentially stall the creation and use of such stablecoins. Sonic Labs, co-founder Andre Cronje named the formation of new legal requirements as one of the reasons for the project cancellation.

In mid-March, Sonic Labs announced its plans to release a yield-generating algorithmic stablecoin for its blockchain environment. However, the emergence of a full draft of the Stablecoin Transparency and Regulation Act (STABLE Act) prompted a quick change.

The bill includes a proposed two-year ban on algorithmic stablecoins, which means that no new ones will be allowed to be created in the United States for the next two years. Cronje further explained the shift on X , saying, “We will no longer be releasing a USD-based algorithmic stablecoin.”

Algorithmic Stablecoins Under Regulatory Spotlight

Unlike the majority of stablecoins, which are anchored to fiat currencies and commodity markets, algorithmic stablecoins rely on smart contracts and alteration of supply. This structure has raised many concerns among regulators, especially after the crash of TerraUSD (UST) in 2022. This led to many market interruptions and losses that can be attributed to UST’s failure.

The collapse of the Terra ecosystem is one of the largest in crypto history, which in a few days brought losses of about $40 billion. UST, which was supposed to yield high returns through the Anchor Protocol, fell to $0.30 and depegged from its $1 USD peg.

Meanwhile, TerraUSD, its sister token, has fallen by more than 98% in value. The incident rekindled the focus on algorithmic stablecoins and paved the way for prospects of reform, such as the STABLE Act.

Community Reactions and Internal Hesitations

Sonic Labs ’ announcement caused various reactions among community members. Some users on social media speculated about how the new rules could be avoided with some strategies, including launching them before the law is implemented.

In a post, Cronje playfully introduced an “algorithmic dirham” that would be pegged to the USD as an idea. Cronje had admitted to the community that previous failures in the field of algorithmic stablecoins involved great emotional pressure.

In an earlier statement, he said, “Pretty sure our team cracked algo stablecoins today, but previous cycle gave me so much PTSD not sure if we should implement.” The comment referred to the stress he went through after the Terra crisis, during which he saw the impact of financial and reputational damage within the industry.

According to the Central Bank of the UAE Governor Khaled Mohamed Balama, blockchain-based currencies can bring a number of advantages that are related to improvements in financial stability and the efficiency of combating financial crime. The UAE has also expressed a willingness to accept some cryptocurrencies since it allows the usage of a dirham based on blockchain technology in addition to the traditional currency.