Author: Botond Bátorfi
Stablecoins have never been so popular, with this class of digital assets finding product-market fit in 2024 according to a16z crypto, a thought leader in the crypto space. More than 142 million wallets currently hold stablecoins, representing a 76% increase compared to the 81 million stablecoin wallets in early 2024. Their usage is also characterized by a wide variety of use cases after having been utilized mainly for exiting and entering volatile crypto trading positions previously.
The industry expects further increases in stablecoin market capitalization and usage with the recent arrival of Donald Trump in the White House. During the campaign, the then President-elect emphasized how important it was for him to make the United States a global powerhouse in digital asset innovation.
Since the most widely used stablecoin is based on the U.S. dollar, it’s hard not to assume that potential actions might also affect USD-based stablecoins. The President has a strong relationship with several prominent crypto market participants and aims to make the US a global powerhouse in digital assets innovation.
Amidst all this positivity, USDT, by far the largest stablecoin today in terms of market capitalization, faces delisting from EU crypto exchanges. This follows Tether’s failure to obtain an e-money license that is now required for stablecoin issuers looking to make their tokens available for trading and holding in the European Union. In this article, we will take a closer look at this situation, examining what led up to this point and how it may play out in the future.
Offering stability in a world centered on volatility
Before delving into the topics at hand, we should start with the basics. Stablecoins are crypto tokens that aim to maintain a stable value through a peg to another asset. They are mostly pegged to fiat currencies (primarily to USD), precious metals such as gold, or a combination of other crypto assets.
For years, the main purpose of stablecoins was to shield investors from the high volatility of most cryptocurrencies by allowing them to lock in profits and losses and transfer value at a stable price on peer-to-peer blockchain networks. While this use case remains prevalent, several other uses for stablecoins are being utilized increasingly, whether it is international payments, or interbank settlements.
Stablecoins could become truly digital cash
Today, stablecoins enable users to move money globally, securely, quickly and affordably, without the use of costly and unnecessary intermediaries. Stemming from their decentralized nature, they know no borders: the users decide who they transact with, and cross-border transactions typically go through within minutes compared to the usual 3-5 business days in the traditional financial system.
All of this is part of why many in the industry liken stablecoin issuers more to next-generation banks and payment providers instead of risky crypto projects. Especially in developing countries where the local currency’s value tends to fluctuate significantly, USD-pegged stablecoins have become a popular option for conducting transactions.
Furthermore, use cases beyond cross-border settlement and the exiting or entering of crypto trading positions now enjoy rapidly increasing usage. Among others, stablecoins are extensively used for P2P and B2B transfers, generating attractive yields on savings, settling trades in digital goods or blockchain-based financial instruments, as well as internal settlement and transaction programming within banks.
Stablecoins pass Visa, PayPal in value of payments processed
As a result of stablecoins finding product-market fit in recent years, their popularity and market capitalization has continued to rise in parallel. There are over 1 million stablecoin wallets currently and last year, stablecoins processed transactions amounting to $24tn. That is 50% higher than was processed by Visa, a global leader in payment facilitation. PayPal processed payments amounting to $1.6tn last year.
USDT, issued by Tether remains by far the largest stablecoin globally. At present, USDT’s $138bn market capitalization translates to an approx. 64% share of the $200bn+ global stablecoin market. However, USDT now faces delisting from EU-based crypto exchanges as a result of failing to comply with the EU’s crypto market regulation, MiCA. But how did we end up here?
A new beginning for Europe brings difficult questions
First things first. MiCA, which is now being applied entirely in the EU27 countries, is probably the most comprehensive crypto regulation to date. It divides regulated parties into two main groups: crypto asset issuers (e.g., Tether, Circle) and service providers (e.g., crypto exchanges, crypto custodians).
The USD-pegged stablecoins such as USDT form part of one of the three types of crypto assets defined by MiCA: e-money tokens. (For more info on MiCA, check out our article and one-pager on it here and here.)
E-money token issuers are expected to adhere to a range of requirements to guarantee appropriate reserve policies and consumer protection. While Circle, the issuer of USDC, the second largest stablecoin has managed to attain a MiCA license, Tether has not done so.
This means that from December 30, 2024, USDT needs to be delisted from crypto exchanges and made unavailable for trading in the entire EU. But what is the exact problem with USDT?
Tether is at a crossroads in the European Union
The reasoning behind Tether not having a MiCA license has a couple of factors to it. First, the company has seen rapid revenue growth in developing regions such as Southeast Asia or Latin Ameria, where it already plays a significant role in facilitating cross-border transactions. This might induce Tether to focus more on those regions instead of Europe.
The high cost of compliance with MICA is likely to be another deterring factor. The regulation requires e-money token issuers to keep at least 30% of their backing reserves with an independent EU commercial bank and monitor all transactions made with USDT for AML purposes. This is a big enough task, especially for Tether, for whom transparency around reserve policies and AML/CFT monitoring has never been a strong point.
The company has often faced criticism in the past for failing to produce independent audits of their reserves and preventing the use of USDT for illicit activites like money laundering. While improvements have been made on that front, a couple months ago it came to light that USDT has been used by Russian oligarchs for moving huge sums of money related to criminal activities and evading sanctions.
Europe leads in terms of clear regulation, but risks missing out on innovation
With the introduction of MiCA, the EU aimed to create a clear regulatory framework for crypto market participants and the right conditions for traditional institutions to offering digital asset services like crypto trading, advisory, or custody. The impending delisting of USDT reinforces the EU’s commitment to creating such an environment but it also jeopardises plans for becoming a leading innovation hub for digital assets.
To get a more complete picture of the potential impact of USDT no longer being available for trade in the EU, we should take a look at the potential positive and negative outcomes!
Positives:
- The decision confirms MiCA as a regulation that promotes consumer protection and does not allow even the biggest player to skip the line;
- This credibility fosters openness from traditional financial institutions and willingness to offer crypto-related services, as some already do; and
- Other issuers will aim to cover the trading and liquidity needs of EU investors who previously relied on USDT (e.g., a shift to USDC and new EUR-pegged stablecoins is expected).
Negatives:
- As USDT is by far the largest and most liquid stablecoin today, its delisting will likely lead to reduced liquidity and increased volatility for crypto traders;
- New issuers will face difficulty in covering this need for liquidity as there are far more trading pairs for USDT than for USDC or any other stablecoin, resulting in disruptions for traders who continually relied on those trading pairs; and
- All this combined with the loss of other popular USDT use cases (e.g., cross-border settlement, yield generation, settling tokenized securities) could reduce interest towards the EU as a digital asset hub, especially since President Trump has big plans to reach US supremacy in this sphere in the coming years.
That being said, the jury is still out on USDT’s fate in the EU, so we are only talking predictions at this point. Moreover, Tether hasn’t ruled out obtaining a MiCA license in the future.
Most leading crypto exchanges have also taken a standby position on the matter, with Binance, Crypto.com, and Revolut still offering USDT for trading in the EU. They are doing so by relying on a grandfathering period which gives 6-18 additional months of preparation to crypto-asset service providers who have been operating prior to the introduction of MiCA. Interestingly Coinbase has already removed USDT from trading, though that may have to do more with its involvement with Circle’s USDC.
We hope this analysis of the situation offered some fresh insights into what might happen later with USDT in the EU, but as for the actual outcomes, for now we need to be patient and keep an eye on further developments.
At Dorsum, we continuously monitor developments in the global blockchain and digital asset space, be it business news, technology trends or regulatory updates. We work actively with our clients on blockchain use cases. If you have questions about the technology, digital assets or are planning to implement a service in this area, do not hesitate to contact us.
Sources: rwa.xyz, Bloomberg – 1,2, The Generalist, CoinMarketCap, Blockchain Lawyer
