Will Tether Leave Europe? MiCA Forces a Tough Choice
Tether, the long-standing leader in the stablecoin market with USDT, faces a tough decision. New MiCA regulations are pushing the company to either adapt to stricter rules or risk being excluded from the European Union.
Adapting to MiCA: The Price of Compliance
Complying with the new European rules will require Tether Limited to make significant changes to how it issues USDT. The company will likely need to overhaul its reserve management system, increase transparency, and possibly eliminate some high-risk, high-reward investments.
These adjustments could lower profitability and complicate business operations.
However, there are signs that Tether is trying to find common ground with regulators. The company has already started blocking crypto wallets on sanctions lists and announced plans to develop technological solutions tailored to the European market.
The first “wake-up call” for Tether came when Coinbase warned of a potential delisting of assets that do not comply with MiCA requirements. Ignoring this signal would be akin to handing over the market leader position to USDC, which has already fully "legitimized" itself in Europe and became the first stablecoin to meet the new European standards.
It’s worth noting that USD Coin (USDC) was created by Circle in partnership with… Coinbase!
Brian Armstrong quickly adapted to the situation, moving ahead of the competition. This rapid adjustment to regulatory demands allows USD Coin not only to maintain its presence on European crypto exchanges but also to potentially attract large institutional investors.
With its transparent reserves, regular audits, and compliance with updated laws, USD Coin now has the opportunity to market itself as a safer and more reliable asset than USDT.
The competition between USDT and USDC has been ongoing for years. Source: Х
The future of USDT, the largest stablecoin by market capitalization, is now in question. Despite its significant control over the market, Tether has frequently faced scrutiny regarding its reserve backing and the mechanisms that ensure its peg to the U.S. dollar. The new European regulations present a serious challenge, forcing Tether to significantly adjust its business model to remain competitive.
European law requires annual independent audits, and Tether’s last audit was in 2023, conducted by BDO, a firm with an official contract to provide auditing services for Tether Holdings. However, because BDO is a Tether Holdings contractor, its findings can’t be considered entirely impartial.
Furthermore, Tether’s 2021 audit raised many concerns: it revealed that 16% of USDT’s reserves were in volatile digital currencies that are highly sensitive to market fluctuations, and another 31% was held in short-term Chinese corporate bonds, which lacked clear financial reporting.
Read more: USDT: Reserve Issues and Risk of Devaluation
Could Tether Exit Europe?
Leaving the European market is one possible option for Tether.
This would allow the company to maintain its flexibility and avoid the heavy regulatory burden. However, doing so could result in the loss of a significant portion of its customer base and introduce new reputational risks. Exiting one of the world’s largest markets could seriously undermine trust in USDT.
Moreover, this creates a period of uncertainty for the industry as a whole: competition among smaller players could intensify, new issuers might seize the opportunity, and users may face potential fluctuations in USDT’s value, along with the need to switch to alternative, less capitalized stablecoins.
Additionally, the “European situation” could lead to similar regulatory changes in the U.S. and Asia. In that case, Tether would have nowhere left to turn.
Therefore, the faster Tether adapts to the new rules, the better it will be for everyone involved.
Another possible outcome of Tether’s decision could be the rise of Central Bank Digital Currencies (CBDCs).
Read more: Can CBDCs Ensure Privacy?
CBDCs may challenge stablecoins. Source: Genesis
The Potential Impact of CBDCs on the Stablecoin Market
Central Bank Digital Currencies (CBDCs) mark a significant new chapter in the history of finance. As a digital form of national currency issued by central banks, CBDCs offer distinct advantages for large corporations and holdings, including faster transaction speeds, stability without volatility, regulatory clarity, and government-backed guarantees.
According to research by OMFIF, the percentage of central banks planning to launch a CBDC within the next five years has increased from 36% to 41%, while the number of those not considering it at all has nearly halved.The reasons for this heightened interest in CBDCs vary by region. In developing economies, the primary motivation is to improve financial inclusion. In more developed countries, central banks see CBDCs as a way to safeguard monetary sovereignty as competition from electronic payment systems grows.
Statistics of central banks planning to launch CBDCs in the coming years. Source: omfif.org
However, the rise of CBDCs will inevitably have a significant impact on other segments of digital assets, particularly the stablecoin market.
Competition for Market Share
One of the most likely outcomes of CBDC implementation is increased competition for payment market share. Stablecoins like USDT and USDC are already widely used for intermediary conversions and value storage. However, with the backing of governments and access to potentially broader infrastructure, CBDCs could become the more appealing choice for many users.
The full-scale rollout of CBDCs will certainly accelerate the regulation of the overall crypto market. Regulators will aim to create clear guidelines for both CBDCs and their direct competitors—stablecoins—to ensure financial stability, promote fair competition, and protect consumers. This could lead to tighter requirements for reserves, transparency, and reporting for stablecoin issuers.
Related: The CBDC Momentum Gathers Pace
Investor Preference Shift
CBDCs are often viewed as safer and more reliable than private stablecoins, primarily because they are government-backed and supported by central bank reserves. This could lead institutional investors to move their assets into CBDCs, seeing them as a more stable financial option.
If this trend materializes, demand for stablecoins may decline.
However, CBDCs might also open doors for new collaborations between central banks and the private sector. Stablecoins could be integrated into CBDC infrastructure, allowing for cheaper transfers between different types of digital assets.
Tether’s Decision Could Reshape the Crypto Market
As Tether marks its 10th anniversary, it faces a turning point with the implementation of MiCA in Europe. The company now has a critical decision to make: either comply with new regulations to keep its position in the largest regulated market or shift focus to more challenging regions like Latin America and Asia, which offer limited growth potential.
The European Union integrates MiCA rules
Tether’s CEO Paolo Ardoino has confidently claimed that his company is as financially stable as some mid-sized countries, like Germany. But these claims may not be sufficient. The new MiCA rules are restrictive, limiting the flexibility of stablecoin operations and potentially stalling progress in this market sector. While it's unfortunate that regulations often stifle innovation in emerging technologies, it seems to be a necessary reality of today’s regulatory landscape.
Ardoino has expressed concerns that requirements such as excessive reserves or the obligation for timely disclosures could jeopardize the compatibility of Tether’s long-established business model with Europe’s strict regulations.
