Tether's EU Future: Can USDT Weather the MiCA Storm, and What Should Crypto Businesses Do?
Summary: The introduction of MiCA has cast a long shadow over Tether's USDT in the EU, raising concerns about its future. Will USDT weather the storm?
Authors:
Tatiana Kontariova
Associate
The introduction of MiCA has cast a long shadow over Tether's USDT in the EU, raising concerns about its future. Will USDT weather the storm? As the crypto world watches, EU-based businesses need not panic just yet. Let’s calmly explore the available options.
What is MiCA?
The EU's Markets in Crypto-Assets regulation, also known as MiCA [1], is European landmark regulation set to reshape the cryptocurrency landscape, aiming to balance Web3 innovation with consumer protection, market integrity, and financial stability.
In terms of stablecoins, MiCA establishes a comprehensive framework for stablecoins offered in the EEA. It determines specific and rather rigorous requirements that stablecoins’ issuers must meet if they want to serve the EEA market. MiCA recognises two primary types of stablecoins:
- E-money tokens: these are pegged to a single official currency and function similarly to electronic money; and
- Asset-referenced tokens: these are pegged to a basket of assets, like multiple currencies, commodities, or other crypto assets.
Why is Everyone Talking About Stablecoins?
Although MiCA will impact the entire crypto ecosystem, stablecoins like USDT are particularly in focus due to increased economical and other risks. With MiCA’s stringent rules looming, it could dramatically alter the stablecoin market.
USD Tether, a stablecoin, falls under the EU’s MiCA regulation as an e-money token. Issuers of e-money tokens must be authorised as credit or electronic money institutions (EMIs) in the EU. For instance, Circle, Tether’s closest competitor, has already secured the first MiCA-compliant EMI licence from the Autorité de Contrôle Prudentiel et de Résolution (ACPR), the French banking regulatory authority. Circle announced that the approval allows both its USDC and EURC tokens to be issued in the EU in compliance with MiCA's stablecoin regulations [2]. In contrast, Tether has remained silent about its intentions to obtain a similar licence, raising questions about its long-term viability in the EU.
The MiCA stablecoin regime became effective on June 30, 2024, however, the entire regulation will be fully enforced starting from December 30, 2024. Accordingly, Tether, the issuer of USDT, may already be in violation of MICA since it has failed to obtain the requisite registrations in the EU.
In response, OKX became the first major cryptocurrency exchange to discontinue support for USDT, phasing out all USDT trading pairs in the EU. Other major exchanges, like Binance and Kraken, have not delisted USDT yet, but are considering limiting its functionality. For instance, Binance has switched to a “sell-only” mode for USDT, allowing EU users to sell it but not buy. Nonetheless, the spot trading pairs with USDT will temporarily remain active, alongside regulated stablecoins.
Can a VASP License Help?
In preparation for MiCA, many crypto businesses obtained VASP licences to continue operating in the EU beyond 2025 and benefit from an extended transition period. MiCA permits crypto-asset service providers (CASPs) that were legally operating before the end of 2024 to maintain their activities until July 1, 2026, or until they receive MiCA authorization or rejection. However, this period is not a regulatory reprieve, rather an opportunity to prepare for and align with the applicable requirements without having to halt the business.
The lack of authorisation as a credit or electronic money institution prevents Tether from making their stablecoins available on the EEA market. But does this automatically call for an immediate ban or USDT delisting by compliant crypto businesses? While one of MiCA's primary goals is consumer protection, an abrupt removal of USDT could negatively impact crypto users. It’s important to understand that an immediate delisting and ban of USDT would send shockwaves through the crypto market, as USDT is by far the largest stablecoin, with a market cap of around $120 billion [3].
Therefore, ensuring a smooth transition is not just beneficial for businesses, but also in the best interests of the government agencies and users.
Can USDT Survive the Regulatory Storm?
The future of USDT, the world’s largest stablecoin, hangs in the balance as it grapples with stringent new regulations. It seems that, in contrast to Circle, Tether faces increased scrutiny regarding transparency, capital adequacy, liquidity, and operational resilience.
In the end of the day, MiCA does pose significant hurdles for stablecoins’ issuers, requiring them to maintain a 1:1 reserve ratio in liquid assets held with a third party. For example, USDC is fully backed by U.S. dollars stored in a bank account, guaranteeing complete redeemability for users. This mechanism is supported by regular audits and transparent disclosures to maintain public confidence. Conversely, USDT is backed by a combination of cash, cash equivalents, and other assets. However, unlike USDC, USDT has faced inquiries and scepticism concerning the transparency and sufficiency of its reserves. Despite third-party attestations, Tether lacks comprehensive audits, a recurring criticism.
Also, MiCA mandates that issuers like Tether maintain at least 60% of their reserves in simple bank deposits. However, the European Central Bank's deposit insurance limit of €100,000 per depositor falls far short of covering Tether’s substantial market capitalization of $120 billion, posing a significant challenge. For instance, the collapse of Silicon Valley Bank resulted in a de-peg event for Circle’s USDC [4].
Furthermore, MiCA imposes strict trading limits on USD-referenced e-money tokens, such as USDT, used as a means of exchange. The daily caps are set at 1 million transactions or 200 million euros in value. Companies exceeding these limits must cease issuing non-euro denominated stablecoins. Given that this cap is significantly lower than USDT's current trading volume, it could drastically limit its usage. It’s interesting to see how Circle manages the transaction limits, given USDC’s significant trading volume as well. To address this, Circle appears to focus on issuing both USDC and Euro Coin (EURC) in Europe, potentially encouraging greater use of EURC to balance transaction volumes. This diversification may help manage transactions under the applicable caps. Additionally, Circle Mint France, with local banking capabilities, offers near-instant and cost-effective minting and redemption of USDC and EURC, potentially allowing for better control over daily transactions and reducing the risk of exceeding limits. So, Tether could consider adopting similar strategies.
Anyway, despite all the above obstacles, Tether does not intend to give up, and it has resources for proper compliance. The company is actively engaging with European regulators to seek amendments to the MiCA regulations, arguing that the current framework, particularly the transaction limits, may be too restrictive for stablecoin issuers. As Tether navigates this regulatory landscape, the outcome will have far-reaching implications for the broader cryptocurrency market.
Adapting to MiCA: Options Available to Crypto Businesses Using USDT:
If your business provides crypto-asset services in the EEA, whether offering custody or administration of crypto assets on behalf of others, running an exchange, etc., you should carefully reconsider making USDT available to EU residents. The decision hinges on various factors, but the most critical is your risk tolerance:
- Delisting. The most secure and straightforward option would be to simply delist USDT until it becomes MiCA-compliant. If you are a non-EU business, then you may delist USDT only for your European users. Several cryptocurrency exchanges, such as OKX and Uphold, have already employed this approach, setting a dangerous precedent for USDT.
- Wait and See. Provided your business is duly registered as a VASP in the EU, you may choose to wait-and-see, since MiCA provides you with a grace period to become compliant with the new regulations. Note that your jurisdiction may impose a shorter transition period or even have none, so this option may not be available in your specific case. Additionally, an existing VASP registration (obtained before MiCA) may only authorise operations in the same country and not in the entire EU.
The future of Tether remains uncertain in the face of impending regulations, but the path forward is clear: it’s crucial for EU-oriented business to be ready for a seamless transition by considering strategic partnerships with compliant stablecoin issuers, implementing automated conversion features, offering incentives or rewards for users who convert their USDT holdings to compliant stablecoins, creating educational materials to help users understand the differences between USDT and MiCA-compliant stablecoins, as well as the regulatory landscape, etc. The time to act is now, before the storm fully hits.
[2] - Circle is First Global Stablecoin Issuer to Comply with MiCA, EU’s Landmark Crypto Law
[3] - According to the market data available at https://coinmarketcap.com/currencies/tether as of October 3, 2024
[4] - Stablecoin USDC breaks dollar peg after revealing $3.3 billion Silicon Valley Bank exposure
