Decline in USDT Market Cap Observed after MiCA Regulation Enforcement
The European Union's MiCA (Markets in Crypto-Assets) regulation, which came into effect on December 30, is poised to significantly impact the stablecoin market, particularly large players like Tether.
The new regulation introduces stringent licensing, reserve, and operational requirements aimed at enhancing investor protection and reducing fraud risks. These requirements will limit the ability of non-compliant stablecoins to operate freely within the EU market.
One of the key aspects of MiCA is the requirement for stablecoin issuers to establish strong internal governance and local presence in the EU, and obtain a single license valid across all 27 EU member states. This simplifies compliance but raises the regulatory threshold.
MiCA also bans algorithmic stablecoins, which lack sufficient tangible backing, a move aimed at mitigating systemic risks demonstrated by past failures like Terra/LUNA. As a result, Tether (USDT) is being delisted from EU exchanges, restricting trading for EU residents.
Under MiCA, stablecoin issuers are mandated to hold full reserves and face joint liability, harmonizing stablecoin governance to reduce risks. However, there are concerns about a regulatory loophole since MiCA covers only EU-based issuers. Stablecoins issued outside the EU, such as jurisdictionally-diverse issuers like Tether, may bypass EU safeguards, potentially exposing the EU financial system to systemic risk if cross-border liabilities arise in crises.
The regulation is part of a broader global wave of stablecoin frameworks, aiming for increased transparency, reduced systemic threats, and fostering responsible innovation. However, large players must adapt to more rigorous scrutiny to maintain their presence and trust within regulated markets.
In summary, MiCA forces major stablecoin issuers like Tether to either comply with tighter regulation or risk losing access and market share in Europe. Its unified licensing and reserve requirements raise costs and operational demands but also increase user trust and market stability. However, the partial regulatory gap for non-EU issued stablecoins remains a systemic risk concern for the EU.
The MiCA framework also imposes licensing, reserve, and liquidity norms on stablecoin issuers. Tether, with its substantial cash reserves and diversified revenue streams, is projected to earn around $10 billion in profits this year. Smaller stablecoin issuers must hold 30% of reserves in low-risk EU commercial banks, while Tether and other major players face a threshold of 60% or more.
The increased costs under MiCA could drive industry consolidation and reduce competition in the EU crypto market. The UK and Switzerland, with favorable regulatory developments, could benefit from the migration of companies leaving the EU due to MiCA. European crypto exchanges like Coinbase Europe have already delisted USDT and five other stablecoins due to regulatory uncertainty.
While Tether's CEO, Paolo Ardoino, has criticised MiCA as a "systemic risk" to stablecoins and the banking system, he has not foreseen significant financial consequences for Tether due to a potential EU exit. Agnė Lingė of WeFi shares this sentiment, stating that compliance with MiCA could be economically burdensome for large stablecoin issuers like Tether.
Despite the challenges, Uldis Teraudkalns, Chief Revenue Officer at Paybis, stated that MiCA will transform the EU crypto landscape with far-reaching effects. Binance and Crypto.com have chosen to maintain support for these assets, awaiting further clarification on MiCA's requirements.
[1] Investopedia. (2022). MiCA: The European Union's Markets in Crypto-Assets Regulation. [online] Available at: https://www.investopedia.com/terms/m/mica.asp
[2] Cointelegraph. (2022). Binance, Crypto.com to maintain support for stablecoins despite MiCA uncertainty. [online] Available at: https://cointelegraph.com/news/binance-crypto-com-to-maintain-support-for-stablecoins-despite-mica-uncertainty
[3] The Block. (2022). MiCA regulatory loophole may expose EU to systemic risk from stablecoins. [online] Available at: https://www.theblockcrypto.com/post/117364/mica-regulatory-loophole-may-expose-eu-to-systemic-risk-from-stablecoins
[4] Finextra. (2022). MiCA regulation: The EU's new rules for crypto assets explained. [online] Available at: https://www.finextra.com/blogposting/20783/mica-regulation-the-eus-new-rules-for-crypto-assets-explained
[5] The Block. (2022). MiCA could boost EUR-pegged stablecoins in Europe. [online] Available at: https://www.theblockcrypto.com/post/116048/mica-could-boost-eur-pegged-stablecoins-in-europe
- The introduction of MiCA regulation will force crypto exchanges to enforce stricter compliance for stablecoin issuers, particularly large players like Tether, in the finance industry, with implications for the business and technology sectors.
- Large stablecoin issuers, such as Tether, stand to gain or lose market share in the European Union based on their willingness to adapt to the tighter regulatory environment imposed by MiCA, impacting both the crypto industry and the global stablecoin market.
