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Will MiCA regulation end Tether’s dominance in the EU? 

In a exclusive, Merkle Science Policy Director Natalia Latka discusses how the MiCA regulation could impact USDT and other stablecoins in the EU.

OKX, one of the largest global crypto exchanges, has recently delisted all USDT trading pairs to ensure compliance with the forthcoming Markets in Crypto-Assets Regulation (MiCA). This has led to significant speculation regarding how other major exchanges will react, as MiCA is set to take effect in June. 

MiCA introduces licensing for crypto-asset service providers (CASPs), issuers of asset-referenced tokens (ARTs), and issuers of electronic money tokens (EMTs), along with detailed regulatory obligations applicable to these entities, including consumer protection rules for the issuance, trading, exchange, and custody of crypto-assets. 

MiCA also establishes a market abuse regime prohibiting market manipulation and insider dealing and clarifies the powers, cooperation, and sanctions framework available to competent authorities.  Under the regulation, crypto-asset services can only be provided by authorized legal persons with established offices in the EU. Significant crypto-asset service providers and significant ARTs and EMTs are subject to additional scrutiny and regulatory requirements due to their potential impact on financial stability and consumer protection.

To understand this complex narrative in a rather simple manner, reached out to Natalia Latka, a leader in crypto compliance and financial crime and a policy director at blockchain analytics firm Merkle Science

Natalia Latka: Tether would be classified as an EMT. Consequently, it must adhere to the specified criteria for EMT issuers within MiCA. EMT issuers are required to obtain authorization as either electronic money institutions or credit institutions. 

This involves a comprehensive application process with the appropriate national authority in the EU, during which the issuer must prove their operational efficiency, financial robustness, and adherence to MiCAR’s regulatory frameworks. For Tether, as an entity primarily based outside the EU, this necessitates the establishment of a legally recognized entity within the EU, setting up an office in one of the EU member states, and ensuring that effective management takes place within the EU. Subsequently, Tether would need to seek authorization as either an Electronic Money Institution (EMI) or a credit institution.

However, given USDT’s size in terms of market cap and user base, there is further complexity. It would likely be categorized as a significant e-money token, which is subjected to stricter requirements due to its potential impact on financial stability. So, Tether will likely have to meet higher capital requirements, adhere to interoperability standards, and develop a robust liquidity management policy. 

So, for the stablecoin provider to continue operating in the EU, they must go through a very complex legal and regulatory pathway. 

What would be the limitations for stablecoins that continue to operate in the EU?

Natalia Latka: Being authorized as a significant EMT issuer indicates that the entity can handle larger volumes of transactions compared to non-significant issuers before triggering regulatory actions such as halting further issuance. However, the precise operational implications for significant EMT issuers who approach or exceed these higher thresholds would depend on the specific case. 

For stablecoins denominated in a non-EU currency, MiCA will impose restrictions through Article 58(3). These constraints kick in when transactions in a single currency exceed 1 million in volume or EUR 200 million daily. Upon surpassing these limits, issuers must cease issuance and devise strategies to diminish their crypto asset’s usage. So, Tether remains subject to these limitations. 

To comply, Tether must analyze MiCA regulations, focusing on definitions of “transactions” and “means of exchange.” Insights from the EBA’s November 2023 consultation will be crucial. Despite possible exemptions, Tether may still exceed these limits, affecting its legality in the EU. 

How will OKX’s decision to delist USDT impact the wider EU crypto market?

Natalia Latka: OKX’s decision could be a precursor to broader changes in Europe. Exchanges may opt to delist or restrict stablecoins that do not comply with MiCA, anticipating regulatory scrutiny or seeking to align with the new legal framework. This shift could either marginalize non-compliant tokens or push their issuers towards compliance. 

While MiCA is a regional regulation, its implications could be global. Non-EU issuers of stablecoins might adjust their operations to access the European market, influencing global standards for stablecoin regulation. Nonetheless, the MiCAR stringent requirements may also negatively impact the operations of stablecoin issuers and their willingness to serve the EU market. 

The reaction of the market to MiCA’s implementation could lead to increased adoption of alternative stablecoins. It’s plausible that EMTs pegged to the Euro might see a rise in popularity. However, it’s a stretch to think that stablecoins tied to the Euro will quickly reach or surpass the trading volumes of their USD-pegged counterparts, or take their place in trading pairs in the near term. 

The market dynamics and the established dominance of USD-referencing stablecoins make such a significant shift unlikely in the immediate future.

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