Image credit: The Byteline

The European Union’s new cryptocurrency regulations, set to take full effect at the end of 2024, are already reshaping the market for stablecoins, potentially jeopardizing the bloc’s position as a crypto trading hub just as President-elect Donald Trump prepares to take office in the United States.

Bloomberg reported that several crypto exchanges operating in the EU have preemptively delisted Tether’s USDT, the dominant stablecoin, to comply with the Markets in Cryptoassets (MiCA) regulation.

This shift is causing disruptions, with investors increasingly defaulting to fiat currencies like the euro for trading. New stablecoin issuers are attempting to fill the void left by Tether’s removal, but concerns over liquidity and market efficiency remain.

MiCA’s rules require stablecoins listed on centralized exchanges to be issued by entities with an e-money license, maintain up to two-thirds of reserves in independent banks, and closely monitor transactions.

While Circle, Tether’s main competitor, secured such a license in July, Tether has not yet obtained one, forcing regulated exchanges to delist USDT by December 30.

Tether’s absence is expected to significantly impact liquidity, as USDT trading pairs dominate global cryptocurrency markets.

According to Pascal St-Jean, CEO of 3iQ Corp., transitioning away from USDT trading pairs will introduce higher costs and inefficiencies for investors. At OKX, an exchange that delisted USDT in April, traders have shifted to fiat currency pairs rather than alternative stablecoins, reflecting the challenges posed by the delisting.

The EU’s move is part of an effort to enhance regulatory oversight and prevent illicit activity, as USDT has been linked to crimes such as money laundering and terrorism financing. A March report by TRM Labs identified USDT as the most-used stablecoin in criminal activities, particularly on the Tron blockchain.

In response, Tether partnered with Tron and TRM Labs to establish a Financial Crime Unit aimed at combating misuse of USDT.

Despite these efforts, critics argue that MiCA may drain liquidity from EU markets without effectively achieving its goals. Isabella Chase, senior policy adviser at TRM Labs, noted that the visibility needed to prevent illicit activity depends on the availability of advanced surveillance tools, which local authorities may lack in the short term.

The regulatory contrast between the EU and the U.S. is stark. Trump’s election has sparked a market rally, with Bitcoin surpassing $100,000 for the first time in November. Expectations of a lighter regulatory touch under the Trump administration, bolstered by the appointment of crypto advocates to key roles, have reignited investor confidence in North America.

While Europe faces challenges in maintaining its competitiveness, some positive trends have emerged. Crypto ownership in the euro area has more than doubled since 2022, according to a European Central Bank report, although adoption rates remain comparatively low.

Venture capital investment in European crypto startups, however, is on track to hit a four-year low in 2024, further underscoring the region’s struggles to keep pace with North America’s recovery.

As Tether’s delisting reshapes the European market, the long-term impact on liquidity, investor costs, and market dynamics will depend on how quickly alternative solutions and regulatory adjustments can be implemented to stabilize the trading ecosystem.

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