Will MiCA Regulations Push Investors Toward USDC Over USDT?

The European Union's new Markets in Crypto Assets (MiCA) framework has sparked debate in the cryptocurrency community, notably among stablecoins such as Tether (USDT). MiCA is altering the way stablecoin issuers operate in the Eurozone by imposing severe compliance standards. The concern is whether these developments would push investors towards MiCA-compliant alternatives such as USD Coin (USDC).

Tethers USDT Faces MiCA Regulation Challenges

MiCA went into effect on December 30, imposing harsh new requirements on stablecoin producers. Companies that manage electronic money tokens (EMT) or asset-referenced tokens (ART) must now get licenses and operate under the careful eye of the European Banking Authority. Essentially, these tokens may only be traded within the Eurozone by approved banks and financial intermediaries.

One of the most significant barriers for Tether is MiCA's demand that the bulk of its collateral assets be held with European credit institutions. This presents a significant difficulty because 83% of Tether's reserves are held in United States Treasury securities and cash equivalents. To comply, Tether would need to transfer a major percentage of its reserves to European banks, which would introduce new risks and difficulties.

Paolo Ardoino, Tether's CEO, has publicly expressed his unwillingness to satisfy these conditions, citing worries about stability and the difficulties of transferring big quantities to third-party institutions. This regulatory disparity may possibly render USDT illegal in the Eurozone.

Compliance Issues for USDT in MiCA Framework

Despite these issues, USDT continues to be the king of stablecoins, with unrivaled liquidity. Binance, Crypto.com, Kraken, and Kucoin are among the major cryptocurrency exchanges that still accept USDT for trading, deposits, and withdrawals. Coinbase, on the other hand, has chosen a different approach, dropping support for USDT in favor of USDC, which is in accordance with MiCA's policies.

For the time being, Tether's supremacy in the stablecoin industry remains firm, with a 64.8% market share and a stunning $133 billion market capitalization. USDT has regularly outpaced USDC in trading volumes since 2019.

However, European regulators may finally persuade exchanges to remove USDT outright. If this occurs, USDT's significance in Europe may diminish, however, users may continue to trade it on decentralized exchanges (DEXs).

MiCA‘s Impact on Tether’s Market Share

Europe makes up only 10-15% of Tether's worldwide USDT trading volume. Tether's core market, however, is Asia, which accounts for 60-70% of its transactions. North America follows with 15-20%, making Europe's legislative barriers less detrimental to Tether's total company.

Recognizing these obstacles, Tether has shifted its emphasis to more crypto-friendly locations. Recently, the firm obtained a Digital Asset Service Provider (DASP) license in El Salvador, allowing it to operate in a jurisdiction that accepts cryptocurrencies. According to Ardoino, El Salvador acts as a hotspot for digital asset innovation and provides Tether with an opportunity to expand its footprint in new regions.

USDT Trading Support and Liquidity Remain Strong

Despite the launch of MiCA, exchanges have not hurried to delist USDT. Binance, the world's largest crypto exchange by trading volume, continues to accept USDT for trading, deposits, and withdrawals, but with certain constraints. Other significant firms, including Crypto.com, Bybit, Kraken, and Kucoin, have also supported USDT.

This continued support underscores USDT's unrivaled status as the most liquid and generally acknowledged stablecoin in the cryptocurrency industry. Tether's broad integration across different blockchains, as well as its essential position in facilitating smooth trading, have made it an industry staple, even as it faces regulatory scrutiny.

Tether Shifts Focus to Asia and America

Asia continues to be Tether's dominant market, accounting for the bulk of USDT trading activity. Asia contributes 60-70% of Tether's yearly trading volumes, owing to favorable legislation and a large user base. With a contribution of 15-20%, North America strengthens Tether's position outside of Europe.

Tether has expanded into emerging markets in Central America in response to MiCA's stringent rules. Tether strengthens its position in crypto-friendly regions by getting the DASP license in El Salvador. This strategic change enables Tether to expand in places with less restricted regulatory regimes.

USDC as a MiCA-Compliant Stablecoin Alternative

While USDT deals with these issues, USD Coin (USDC) is developing as a significant competitor, notably in the European market. USDC is completely MiCA-compliant, which gives it an advantage over investors searching for regulatory transparency and security. Its compatibility with the MiCA architecture makes it a compelling alternative for Eurozone users.

However, in terms of liquidity and trade volumes, USDC remains behind USDT. Since April 2019, USDT has regularly outperformed USDC, underscoring the challenge of displacing Tether as the primary stablecoin issuer.

Final Thoughts:

Tether and its flagship stablecoin, USDT, will undoubtedly face challenges as a result of the MiCA legal framework. While Europe's tight regulations may limit Tether's development in the Eurozone, its dominance in Asia and expansion into crypto-friendly areas such as El Salvador ensure that it remains a prominent participant in the sector.

MiCA-compliant alternatives, like USDC, may gain popularity in Europe, but their capacity to challenge Tether's liquidity and broad acceptance remains unknown. Investors will have to decide between USDT and USDC based on regional preferences and regulatory goals.

As the effect of MiCA emerges, the stablecoin market may vary, but one thing is certain: Tether's position at the top will not be disturbed easily.