The cryptocurrency world is in a state of flux. With regulatory frameworks like the European Union's Markets in Crypto-Assets (MiCA) coming into play, things are changing fast. This new development is huge for the global cryptocurrency liquidity landscape, especially for stablecoins like USDT, USDC, and FDUSD. Let's dive into what MiCA means for liquidity in the market.
Shifting Dynamics in the Post-MiCA Landscape
MiCA is not just some run-of-the-mill regulation. It introduces strict requirements for stablecoin issuers, notably affecting liquidity in Europe. One of these is that issuers must hold a large chunk of reserves in liquid, low-risk assets. As a result, Tether’s USDT was delisted from European exchanges, which has led to less variety and potentially reduced liquidity.
In just the last month, USDC’s supply ballooned by $954 million, while USDT's growth was a mere $792 million. Some analysts think USDC has the upper hand thanks to MiCA, which has been fully operational in Europe since December 30, 2024. FDUSD is also making waves, capturing 48% of the trading volume in BTC pairs on Binance. This shows that USDT is giving away its crown to another stablecoin, as it was previously responsible for 42% of BTC trading volume.
To operate in the EU, crypto-asset service providers must now get MiCA authorization. It looks like USDC and FDUSD are the big winners here, while USDT’s storm has arrived in the form of being dropped by exchanges operating in the EU.
The Tether Dilemma Under MiCA
What is MiCA? It's a comprehensive EU regulation meant to provide a unified framework for regulating cryptocurrencies, including stablecoins, aimed at ensuring financial stability and consumer protection. It’s a complex beast, overseen by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA).
Proposed in 2020, MiCA has been rolled out gradually but was fully implemented by the end of 2024. It seeks to replace a patchwork of national regulations with a single EU-wide framework affecting all stablecoin issuers in Europe.
Tether is seemingly making changes. Recently, they announced their registration in El Salvador, planning to move operations from the British Virgin Islands to the crypto-friendly Central American nation.
Tether’s USDT has a global footprint, heavily involved in various international markets and blockchains. Despite this, it has always faced regulatory challenges and scrutiny regarding its reserves. In the US, Tether has had its share of troubles, including a significant case from the New York Attorney General. Back in 2021, Tether and Bitfinex had to cough up an $18.5 million fine for allegedly misleading the public about its reserves.
Even though USDT has chosen not to comply with MiCA regulations in Europe, it continues to be the king of stablecoins. It remains widely used in regions with high crypto adoption, such as Asia, Africa, and North America.
A Global Comparison: USDC and FDUSD Rising
MiCA has been a stumbling block for USDT but an opportunity for USDC and FDUSD. The latter two have made strides in trading volumes globally. USDC’s weekly trading volume has skyrocketed to $23 billion in 2024, up from $5 billion in 2022, partly due to its re-listing on major centralized exchanges like Binance. It holds a dominant 70% of the Solana stablecoin market, indicating strong global uptake.
FDUSD is younger and smaller than USDC but is quickly gaining traction. It’s filling the void left by BUSD's collapse and enjoys healthy trading activity, especially in BTC markets. Its 48% share of BTC trading on Binance shows it's becoming a solid USD-pegged stablecoin.
Both USDC and FDUSD are getting a boost from traders looking to ditch USDT, largely due to compliance. Yet, USDC’s wider reach and MiCA alignment have given it a significant upper hand globally, including outside Europe. FDUSD, while still small, is catching up fast thanks to its reliability and acceptance in busy trading pairs.
The Long-Term Picture: MiCA's Broader Implications
The long-term effects of MiCA on stablecoin market shares are significant. JP Morgan predicts that MiCA will increase the share of Euro stablecoins, as European banks and financial institutions adopt them to meet customer demand and facilitate blockchain transactions. The low current market share of Euro stablecoins (0.12% of the overall stablecoin market) is expected to rise.
MiCA comes with its own set of rules, including caps on stablecoin transactions not linked to an EU currency, limiting them to 1 million transactions daily or 200 million euros by notional value. These measures aim to push the use of Euro stablecoins and reduce the risks from large-scale adoption of non-EU stablecoins. This could shift the market away from USD-denominated coins like USDC, USDT, and BUSD, diminishing their influence in Europe.
MiCA aims to secure stablecoins by requiring a 1:1 backing of liquid reserves. Combined with compliance measures, this could attract institutional investors and stabilize the crypto market overall. Yet, the costs of compliance might be a temporary hurdle.
But it’s not all rainbows and sunshine. There are concerns that MiCA's restrictions, particularly the localisation and transaction caps, could be too tight. For example, requiring stablecoin providers to disperse reserves among local banks could hinder adoption and put EU-based stablecoins at a disadvantage.
On the DEX side, USDT trading might still entice traders seeking liquidity, as DEXs are not bound by these new regulations. This might keep USD-denominated stablecoins afloat in certain market segments.
Summary: The Path Ahead for Stablecoins
In short, MiCA is changing the game for global cryptocurrency liquidity. Less liquidity is expected in Europe due to strict regulations on stablecoins, potentially hindering innovation and startup growth, while also pushing market activity to more lenient regulatory spaces. USDC and FDUSD are gaining from this, while USDT is struggling in Europe. The long-term picture suggests Euro stablecoins will gain market share, while USD-denominated coins could lose their dominance. How stablecoin issuers maneuver through regulations like MiCA will be crucial for their future and the market’s stability.
