What is MiCA?

The introduction of the Crypto Asset Market Regulation (MiCA) by the European Union raises important questions about the future of Tether's USDT in Europe. With industry watchers and market participants keeping an eye on these developments, businesses within the EU can respond to the situation with sound confidence by having a thorough understanding of their options and the evolving regulatory environment.

MiCA, an acronym for EU Crypto Asset Market Regulation, represents a major overhaul of Europe's cryptocurrency framework. Its main goal is to harmonize digital asset regulation among Member States, while promoting the advancement of Web3 innovation, while balancing the needs of strong consumer protection, market integrity and financial stability. By establishing clear rules and licensing requirements, MiCA has established a unified system to regulate a wide range of crypto assets covering securities, electronic currencies, etc., and applies to crypto asset service providers (CASP) operating in the European Economic Area (EEA).

Stable Coins under MiCA

For stablecoin issuers targeting the European Economic Area market, MiCA has introduced strict compliance standards. The regulation divides crypto assets into three broad categories:

Electronic or electronic currency tokens (EMTs): These are digital tokens that are primarily used as payment methods and maintain a stable value by being backed by reserves comparable to fiat currencies. Under MiCA, any electronic currency token that retains the value of legal tender in the EU is considered electronic currency as defined by the Electronic Currency Directive.

Asset Reference Tokens (ARTs): Unlike EMTs, ARTs are designed to stabilize value by referencing one or more assets, rights, or a combination of both. These tokens are not classified as electronic money because they are tied to a basket of assets or other underlying goods, rather than a single legal tender.

Other Crypto Asset Tokens: This category is used as a general term for crypto assets that do not meet the definition of EMT or ART. Managed under MiCA Title II, this group includes, for example, utility tokens that do not meet the definition of financial instruments under the Markets in Financial Instruments Directive (MiFID II).

MiCA requirements for stablecoin issuers

According to MiCA's classification, the regulation mainly targets electronic currency tokens and asset reference tokens. Here are MiCA's regulatory requirements for stablecoins:

Issuer Licensing/Authorization: Only EU credit institutions and e-money institutions authorized under the E-money Directive are allowed to issue e-money tokens. This means that the issuer is usually required to obtain an electronic money institution (EMI) license issued by the competent authorities of the EU member states.

White Paper Disclosure: The issuer must prepare and publish a detailed white paper describing the token's characteristics, governance, risk factors, and other key information. The document must be submitted to the competent authorities at least 20 working days prior to its publication in order to provide transparency and facilitate regulatory review.

"Materiality" criteria: MiCA introduces additional safeguards for "significant" issuers, characterized by a large number of holders, significant market capitalization, large daily trading volumes, and deep integration with the financial system. Important issuers of e-money tokens face higher prudential, governance and liquidity requirements, including the need for stronger recovery and redemption schemes (see Regulation of the European Parliament and Council of 31 May 2023 on crypto-asset markets).

MiCA requires small stablecoin issuers to keep 30% of their reserves in low-risk commercial banks in the EU, while large players like Tether must keep 60% or more of their reserves in banks (see the regulation of the European Parliament and Council of 31 May 2023 on the market for crypto assets).

Governance standards: Issuers need robust internal governance procedures, risk management frameworks, and detailed anti-money laundering (AML) and know your customer (KYC) policies that comply with EU financial regulations.

Why USDT (not yet) does not meet MiCA requirements

Reserve requirements

One of Tether's main challenges in meeting MiCA regulations is the reserve requirement. MiCA sets different reserve thresholds depending on the size of the stablecoin issuer.

Smaller stablecoin issuers must place 30% of their reserves in low-risk banks in the EU, while larger issuers must allocate 60% or more of their reserves to banks within the EU (see the regulation of the European Parliament and Council of 31 May 2023 on the market for crypto assets).

For Tether, which has a market capitalization of $130 billion to $140 billion, that requirement may not be economically feasible. Managing such a large proportion of reserves in EU banks adds operational complexity and could disrupt Tether's global business model.

However, while Tether may exit or restructure operations in Europe, its large size and profitability may shield it from immediate financial impact. Tether, which is expected to make $10 billion a year and has large cash reserves, may be able to handle short-term challenges. The real question remains whether Tether will adjust its structure to meet MiCA requirements or decide to leave the EU market altogether.

Lack of EU electronic money (E-Money) licence

MiCA also requires stablecoin issuers operating in the EU to obtain appropriate licenses, such as Electronic Money Agency (EMI) licenses, to issue electronic money or asset reference tokens.

As of now, Tether has not announced or certified that it holds such a license in any EU jurisdiction. In the absence of this approval, Tether may be considered non-compliant once MiCA's transition period ends, which poses a significant obstacle to its operations in the EU.

Coinbase off USDT in Europe

A significant factor in USDT's precarious position in Europe has been the unlisting of Tether from Coinbase for EU customers. The exchange said the reason for the drop was changing regulatory requirements and a desire for full compliance. The Coinbase decision sparked a heated debate:

Proponents argue that this will minimize legal risk and ensure user protection.

Critics argue that Coinbase action is premature, pointing out that no European regulator has explicitly declared Tether non-compliant.

Still, Coinbase's decision highlights the need for exchanges to proactively manage regulatory risk. At the same time, the European Securities and Markets Authority (ESMA) has not yet explicitly ruled that USDT is non-compliant, leaving the situation in a legal gray area.

Other players are still in the market

Not all exchanges follow Coinbase's lead. Giants like Binance and Crypto.com are currently continuing to offer USDT trading pairs in European jurisdictions and have chosen to wait for clearer guidance from regulators. The platforms said they will not make major decisions about taking off shelves or changing their stablecoin products until they have a clearer understanding of MiCA enforcement.

In addition, multiple European-based stablecoins and new entry projects-sometimes launched by regulated institutions-are struggling to position themselves as compliant alternatives. This includes stablecoins backed by euro reserves as well as stablecoins seeking e-money licenses in several EU countries.

MiCA Impact on USDT-Market Drops and Ongoing Risks

Recently CoinGecko data show that the global market value of USDT has dropped from more than $141 billion on December 19 to just over $138 billion about ten days later, which coincides with the MiCA effective date and increasing regulatory discussions. Although macro factors may also play a role in this, many analysts believe that the EU's increased regulation is a contributing factor to Tether's recent decline.

Potential results for USDT

EU market exit: Tether could be forced to leave the EU if it fails to comply. Although some experts believe that the global reach of USDT may protect it financially, a formal ban could seriously disrupt the liquidity of European exchanges, increase trading costs and reduce the trading volume of Tether trading pairs.

Reserve restructuring: In order to maintain access to the EU market, Tether may try to meet MiCA's reserve and disclosure requirements, which may incur significant costs and require restructuring its banking relationships.

Short-term volatility: European traders rely heavily on USDT to provide liquidity. If USDT trading pairs are massively withdrawn, traders may face temporary price misalignment and higher slippage in and out of euro-denominated trading pairs.

The rise of USDC as a compliant alternative

With the future of USDT in Europe shaky, Circle's dollar coin (USDC) seems poised to seize the opportunity. USDC is known for its transparent reserves and frequent audits by top accounting firms, and Circle also actively interacts with global regulators-for example, obtaining an e-money license in France.

Regulatory recognition: USDC's compliance record and its existing licensing structure make it more likely that it will meet MiCA's requirements for stablecoins, which encourages exchanges to retain and even expand their USDC listings.

Market Shift: If the liquidity of USDT is reduced, USDC is expected to occupy the main share of stable currency trading pairs in the EU. This shift, while potentially uneven, reflects traders' preference for a stablecoin with clear asset backing and friendly regulation.

"wait and see" attitude

At this stage, there is no immediate concern about the status of USDT in the EU. Many of the major players in the crypto space continue to trade USDT trading pairs, taking a cautious "wait and see" attitude. The companies are waiting for clearer guidance from MiCA before making major changes.

For now, you can proceed with business operations involving USDT. Keep an eye on developments and be prepared to make adjustments when MiCA provides clearer regulations. In this period of regulatory uncertainty, it is also a time for the industry to adjust and prepare for potential compliance requirements.

Long term outlook

Integration and compliance: MiCA may force smaller and less regulated stablecoin issuers out of the EU, allowing compliance-rich players such as Circle(USDC) to occupy a narrower market segment.

Innovation and expansion: Although MiCA has increased costs, it may also promote innovation by prompting existing companies to improve their products (for example, to achieve fully transparent on-chain reserve certification).

Geo-Shifting: If the regulatory burden in some EU countries is too high, some companies may move to crypto-friendly European jurisdictions or areas close to the EU (such as the UK and Switzerland).

Conclusion

The emergence of MiCA marks a watershed moment for the EU crypto industry. While Tether's USDT maintains a strong global presence, its future in the European Single Market depends on its ability to meet MiCA's strong liquidity and disclosure requirements. Coinbase pre-emptive USDT underscores the urgency for stablecoin issuers to address these new standards-or risk losing market share.

At the same time, with its established compliance credentials, Circle's USDC is likely to be the beneficiary of this regulatory shift. Whether USDT will be able to adapt or give way to competitors remains an open question, highlighting the role of MiCA in reshaping the European stablecoin landscape for years to come. The push towards a more transparent and resilient stablecoin could eventually strengthen the market-although this will almost certainly bring short-term volatility and force issuers and exchanges to make difficult decisions.