impact mica

What is the impact of MiCA on USDT

Table of Contents

Understanding MiCA

The EU’s introduction of the Markets in Crypto-Assets (MiCA) regulation has raised important questions about the future of Tether’s USDT in Europe. As industry observers and market participants closely monitor these developments, EU-based businesses can approach the situation with measured confidence by thoroughly understanding their options and the evolving regulatory terrain.

MiCA, shorthand for the EU’s Markets in Crypto-Assets regulation, represents a significant overhaul of the European cryptocurrency framework. Its primary goal is to harmonize digital asset regulation across member states, balancing innovative Web3 advancements with the need for strong consumer protection, market integrity, and financial stability. By setting clear rules and licensing requirements, MiCA establishes a unified system that governs a broad spectrum of crypto assets—covering securities, e-money, and more—and applies to crypto-asset service providers (CASPs) operating within the European Economic Area (EEA).

Stablecoins under MiCA

For stablecoin issuers targeting the EEA market, MiCA introduces strict compliance standards. The regulation classifies crypto assets into three main categories:

  1. Electronic or E-money Tokens (EMTs): These are digital tokens intended primarily for use as a payment method, designed to maintain a stable value by being backed by a reserve that mirrors a fiat currency. Under MiCA, any e-money token that preserves the value of a Union fiat currency is considered electronic money as defined by the E-money Directive. 
  2. Asset-Referenced Tokens (ARTs): Unlike EMTs, ARTs aim to stabilize value by referencing one or more assets, rights, or a combination of both. These tokens are not categorized as e-money because they tie their value to a basket of assets or other underlying commodities rather than a single fiat currency.
  3. Other Crypto Asset Tokens: This category serves as a catch-all for crypto assets that do not fit into the EMT or ART definitions. Governed by Title II of MiCA, this group includes tokens such as utility tokens, which do not qualify as financial instruments under the Markets in Financial Instruments Directive (MiFID II).

MiCA’s Requirements for Stablecoins Issuers

Based on MiCA’s categorization, the regulation primarily targets electronic money tokens and asset-referenced tokens. Below is MiCA’s regulatory requirements for Stablecoins:

  1. Permitted issuers/ authorisation: The issuance of e-money tokens is only permitted for EU credit institutions and for electronic money institutions (authorised under the E-money Directive). This means that issuers generally require an Electronic Money Institution (EMI) license issued by an EU member state’s competent authority.
  2. White paper disclosure: Issuers must prepare and publish a detailed white paper describing the token’s features, governance, risk factors, and other essential information. This document must be submitted to the competent authority at least 20 working days before publication, providing transparency and enabling regulatory oversight.
  3. Significance Criteria: MiCA introduces additional safeguards for “significant” issuers, characterized by criteria such as a high number of holders, substantial market capitalization, large daily transaction volumes, and deep integration with the financial system. Significant e-money token issuers face higher prudential, governance, and liquidity requirements, including the need for more robust recovery and redemption plans (see Regulation of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets).
  4. Reserve Requirements: MiCA requires that small stablecoins issuers keep 30% of their reserves in a low-risk commercial bank within the EU, while bigger players like Tether must keep 60% or more in banks (see Regulation of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets).
  5. Governance Standards: Issuers need robust internal governance procedures, risk management frameworks, and detailed anti-money laundering (AML) and know-your-customer (KYC) policies compliant with EU financial regulations.

Why USDT Is Not (Yet) MiCA-Compliant

Reserve Requirements:

One of the main challenges for Tether in meeting the MiCA regulations is the reserve requirements. MiCA outlines different reserve thresholds based on the size of the stablecoin issuer. 

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

For Tether, which has a market capitalization ranging between $130 billion and $140 billion, this requirement could be economically impractical. Managing such a significant portion of reserves within EU banks adds operational complexity and might disrupt Tether’s global business model.

However, Tether’s large scale and profitability may cushion it from immediate financial impacts, even if the company exits or restructures its operations in the EU. With projected earnings of $10 billion for the year and substantial cash reserves, Tether could likely handle short-term challenges. The real question remains whether Tether will adapt its structure to comply with MiCA or decide to withdraw from the EU market altogether.

Lack of an EU Electronic Money (E-Money) License:

MiCA also requires stablecoin issuers operating in the EU to secure the appropriate licenses, such as an Electronic Money Institution (EMI) license, to issue electronic money or asset-referenced tokens.

As of now, Tether has not announced or demonstrated that it holds such a license in any EU jurisdiction. Without obtaining this approval, Tether could be considered non-compliant once MiCA’s transitional period ends, posing a significant obstacle to its operations within the EU.

Coinbase Delisting USDT in Europe

A significant indicator of USDT’s precarious standing in Europe came when Coinbase delisted Tether for EU customers. The exchange cited evolving regulatory requirements and a desire to remain fully compliant. Coinbase’s decision ignited a heated debate:

  • Proponents praised the move for minimizing legal risks and ensuring user protection.
  • Critics argue that Coinbase acted prematurely, pointing out that no European supervisory body has explicitly declared Tether non-compliant.

Nonetheless, Coinbase’s decision underscores the growing pressure on exchanges to proactively manage regulatory exposure. Meanwhile, the European Securities and Markets Authority (ESMA) has not definitively ruled USDT out of compliance, leaving the situation in a legal gray area.

Other Players Remain in the Market

Not all exchanges have followed Coinbase’s lead. Giants like Binance and Crypto.com have, so far, continued offering USDT pairs in European jurisdictions, opting to wait for more explicit guidance from regulators. These platforms have indicated they will observe MiCA enforcement closely before making any major decisions about delisting or altering their stablecoin offerings.

Additionally, multiple European-based stablecoins and newer entrants—sometimes launched by regulated institutions—are working to position themselves as compliant alternatives. This includes stablecoins backed by Euro reserves and stablecoins seeking e-money licenses in multiple EU countries.

Impact on USDT – Market Drop and Ongoing Risks

Recent CoinGecko data shows that USDT’s global market cap dipped from over $141 billion on December 19 to just above $138 billion in a span of about ten days, coinciding with MiCA’s effective date and growing regulatory chatter. While macro factors could also be in play, many analysts see heightened regulation in the EU as a contributing factor to Tether’s recent dip.

Potential Outcomes for USDT

  • EU Market Exit: If Tether fails to comply, it may be forced to exit the EU. Although some experts argue USDT’s global footprint might insulate it financially, a formal ban could severely disrupt liquidity on European exchanges, increasing transaction costs and decreasing trading volumes for Tether pairs.
  • Reserve Restructuring: To maintain access to the EU market, Tether may attempt to meet MiCA’s reserve and disclosure mandates, potentially incurring significant costs and restructuring its banking relationships.
  • Short-Term Volatility: European traders heavily rely on USDT for liquidity. If USDT pairs get pulled en masse, traders could face temporary price dislocations and higher slippage in and out of euro-denominated pairs.

The Rise of USDC as a Compliant Alternative

As USDT’s future in Europe wavers, Circle’s USD Coin (USDC) appears primed to capitalize. USDC is known for its transparent reserves and frequent audits by top accounting firms, and Circle has actively engaged with regulators worldwide—gaining an e-money license in France, for instance.

  • Regulatory Stamp of Approval: USDC’s track record of compliance and its existing license structure make it more likely to fulfill MiCA’s stablecoin requirements, encouraging exchanges to keep or even expand their USDC listings.

Market Shift: If USDT’s liquidity diminishes, USDC could capture the lion’s share of stablecoin trading pairs within the EU. This transition, while possibly uneven, would reflect traders’ preference for a stablecoin that is visibly backed and regulator-friendly.

“Wait and See” Approach

At this stage, there’s no need for immediate concern regarding USDT’s position in the EU. Many major players in the crypto space continue trading USDT pairs, adopting a cautious “wait and see” approach. These companies are waiting for clearer guidance from MiCA before making significant changes.

For now, you can continue your business operations involving USDT. Monitor developments closely and be prepared to adapt once MiCA provides more definitive regulations. This period of regulatory uncertainty is also a time for the industry to adjust and prepare for potential compliance requirements.

Long-Term Outlook

  • Consolidation and Compliance: MiCA may drive smaller and less regulated stablecoin issuers out of the EU, leading to a narrower field of well-funded, compliant players like Circle (USDC).
  • Innovation and Expansion: Even as MiCA imposes higher costs, it could also foster innovation by prompting incumbents to refine their offerings (e.g., fully transparent on-chain proofs of reserves).
  • Geographical Shifts: Some companies may relocate to crypto-friendly European jurisdictions or near-EU territories (such as the UK and Switzerland) if the regulatory burden in certain EU countries is too high.

Conclusion

The emergence of MiCA represents a watershed moment for the EU’s crypto industry. While Tether’s USDT maintains a commanding global presence, its future in the European single market hinges on meeting MiCA’s robust liquidity and disclosure mandates. Coinbase’s preemptive delisting of USDT highlights the urgency for stablecoin issuers to address these new standards—or risk losing market share.

Meanwhile, Circle’s USDC is among the most likely beneficiaries of this regulatory shift, given its established compliance credentials. Whether USDT can adapt or cede ground to competitors remains an open question, one that underscores MiCA’s role in reshaping Europe’s stablecoin landscape for years to come. The push toward more transparent, resilient stablecoins may ultimately strengthen the market—though it is almost certain to bring near-term volatility and force tough decisions for issuers and exchanges alike.