(Bloomberg) -- European Union cryptoasset regulations set to take full force at year-end are already reshaping the market for a key type of digital token, potentially weakening the bloc’s appeal to investors just as crypto convert Donald Trump gets ready to take office in the US.
Several crypto exchanges operating in the EU have already delisted the dominant stablecoin, Tether Holdings Ltd.’s USDT, to comply with the Markets in Cryptoassets regime. That’s rippling through the market for such instruments, with new issuers seeking to fill the void and investors defaulting to using the euro for trading in and out of cryptocurrencies.
The new EU rules were designed to give regulators greater insight into crypto flows and help prevent crimes like money laundering, which blockchain forensics experts have said USDT is frequently used for. But crypto executives caution that MiCA may end up draining liquidity from markets without achieving the EU’s goals, denting the bloc’s attractiveness to digital-asset traders at a critical time.
“I understand why it’s been done to a certain extent, but it’s quite exclusionary and quite limiting for EU clients themselves because [USDT] is the most liquid stablecoin by a country mile,” said Usman Ahmad, chief executive officer of Standard Chartered Plc-backed crypto trading firm Zodia Markets Holdings Ltd.
Stablecoins are typically pegged to an asset like the dollar or euro. That’s made them a critical tool for crypto traders to move in and out of positions, or transfer funds between platforms. They’ve also become more useful for firms looking to move money across borders, facilitate faster and cheaper digital payments and for investors looking to trade and settle traditional assets such as bonds using blockchain technology.
That rise has been accompanied by growing concern that stablecoins are being used for illicit purposes. Earlier this month, UK police said they shut down Russian networks that were moving billions of dollars for oligarchs, street gangs and spies. The networks made use of USDT, the National Crime Agency said.
Tether said at the time that it “unequivocally condemns the illegal use of stablecoins and is fully committed to combating illicit activity.”
MiCA’s Guardrails
As part of the effort to tighten oversight of the asset class, MiCA requires all stablecoins listed on centralized exchanges to be issued by an entity with a so-called e-money license. Issuers must keep up to two-thirds of reserves backing their tokens with an independent bank and monitor all transactions made for payment purposes, among other things.
Circle Internet Financial Ltd., Tether’s main competitor, received such a permit in July. Tether has yet to obtain one, although it hasn’t ruled out trying to do so in the future. Barring that happening, regulated exchanges must delist the token by Dec. 30. Tether had no comment on its plans for an e-money license.
Even with MiCA’s guardrails in place, local authorities will need to invest in upgrading their surveillance tools to keep track of and prevent illicit transactions — something that’s unlikely to happen in the short term, said Isabella Chase, a senior policy adviser at blockchain analytics firm TRM Labs.
“The visibility doesn’t come from MiCA, it comes from the tools that they have access to,” she said.
A report published by TRM Labs in March said USDT was the most-used stablecoin for criminal activity like terrorism financing in 2023. It singled out the use of USDT on the Tron blockchain as a go-to method for criminals. Months after the report was published, Tether announced a partnership with Tron and TRM Labs to establish a “Financial Crime Unit” to combat illegal use of USDT.
Friends in Washington
At the same time, competitive pressures are increasing quickly, with a years-long effort by the US Securities and Exchange Commission to crack down on crypto companies large and small giving way to a president-elect who has named several digital-asset advocates to key posts — including to run the SEC. Howard Lutnick, the Cantor Fitzgerald LP CEO whose firm helps to custody Tether’s $85 billion holdings of Treasury bills, is Trump’s pick to oversee the Department of Commerce.
Trump’s election win in early November ignited a market frenzy that sent Bitcoin above $100,000 for the first time and triggered dizzying rallies in many smaller, more speculative tokens. Investors have been piling in on expectations that the US will impose a light regulatory touch after he takes office.
Against that backdrop, the risk is that Europe will become a crypto backwater. While there aren’t any reliable data on trading volumes for the continent as a whole, there are signs of malaise. Venture capital investment in crypto startups in Europe, for example, is poised to drop to a four-year low in 2024, based on data from PitchBook. North America, by contrast, has seen a marked recovery.
There are some encouraging signs. Crypto ownership in the euro area has more than doubled since 2022, to 9%, according to a European Central Bank report published Thursday. The ECB cautioned, however, that the increase may be distorted by a methodology update since the 2022 survey — and it called the current adoption rate “comparably low.”
The removal of Tether from various platforms is likely, in the short term at least, to lead to a substantial drop in liquidity for traders who for years have been relying on Tether. Globally, there are far more USDT trading pairs available than for the second-biggest stablecoin, Circle’s USDC.
“A vast proportion of cryptoassets trade in a pair against Tether’s USDT,” said Pascal St-Jean, CEO of crypto asset manager 3iQ Corp. “So the cost to investors having to trade out of a USDT pair, just to buy the same asset trading against another stablecoin, will cause disruption.”
At crypto exchange OKX, which delisted USDT in the EU in April, traders have shifted to using fiat trading pairs rather than relying on other stablecoins, according to Europe CEO Erald Ghoos. “I was quite surprised by that,” he said.
--With assistance from Alexander Weber.
©2024 Bloomberg L.P.