The regulatory landscape for stablecoins is undergoing a profound transformation, with the United States and Europe adopting markedly different approaches. On one hand, the U.S. Securities and Exchange Commission (SEC) has provided much-needed clarity for fully collateralized stablecoins like USDT (Tether) and USDC (USD Coin). On the other hand, Europe’s Markets in Crypto-Assets (MiCA) regulation imposes stringent restrictions that could stifle liquidity and innovation in the region. This divergence raises critical questions about the future of stablecoins and their role in the global financial system.

The U.S. Approach

The SEC’s recent announcement that fully collateralized stablecoins are not securities represents a pivotal moment for the crypto industry. By defining “covered stablecoins” as those backed 1:1 by fiat reserves or low-risk, highly liquid assets, the SEC has removed significant regulatory uncertainty. Issuers of these stablecoins are not required to register their minting or redemption activities, provided they adhere to strict transparency and reserve requirements.

This decision aligns with broader U.S. policy objectives, including maintaining the dollar’s dominance as the global reserve currency. Stablecoins like USDT and USDC, which collectively account for over $200 billion in market supply, are increasingly seen as critical infrastructure for the digital economy. Their stability and liquidity make them indispensable tools for institutional trading, decentralized finance (DeFi), and cross-border payments.

The SEC’s stance is complemented by legislative efforts such as the STABLE Act and the GENIUS Act, which aim to establish a comprehensive federal framework for stablecoins. These bills emphasize consumer protection, reserve transparency, and the segregation of assets, while also encouraging innovation. The U.S. Treasury has even highlighted stablecoins as a strategic asset to extend dollar dominance, underscoring their geopolitical significance.

Europe’s Approach

In stark contrast, Europe’s MiCA regulation imposes a series of restrictions that could cripple the stablecoin market. Key provisions include a ban on offering interest on stablecoins, a daily issuance cap of €200 million, and a requirement that 60% of reserves be held in EU-based banks. Additionally, issuers must obtain full licensing, undergo regular audits, and establish local legal entities within the EU.

These measures are ostensibly designed to protect consumers and ensure financial stability. However, they fail to account for the realities of the stablecoin market, where over 90% of usage comes from professional trading firms rather than retail payments. These firms require 24/7 liquidity, seamless issuance and redemption, and yield opportunities—needs that MiCA’s framework fundamentally disrupts.

The requirement to hold a majority of reserves in EU banks is particularly problematic. European banks generally offer lower yields compared to U.S. Treasuries, which are the preferred reserve asset for issuers like Tether. Tether, for instance, holds only 0.06% of its reserves in bank deposits, with the bulk invested in U.S. Treasuries, generating over $6 billion annually in passive income. Complying with MiCA would force Tether to abandon this profitable model, making it unlikely to seek compliance.

The Implications for Liquidity and Innovation

The contrasting regulatory approaches have profound implications for liquidity and innovation in the stablecoin market. In the U.S., the SEC’s clarity is expected to boost market confidence and attract institutional adoption. Major financial institutions like Bank of America and Visa are already exploring stablecoin integration, signalling a potential surge in demand.

In Europe, however, MiCA’s restrictions could drive issuers and traders to more favourable jurisdictions. The daily issuance cap alone could create bottlenecks, while the ban on interest eliminates a key incentive for holding stablecoins. These limitations are likely to deter professional trading firms, which are the primary drivers of stablecoin liquidity. As a result, Europe risks falling behind in the global race to lead the digital asset economy.

Why Tether Won’t Comply

In my opinion, Tether’s decision not to comply with MiCA is both strategic and pragmatic. The company’s business model relies on maximizing returns from its reserve assets, primarily U.S. Treasuries. Complying with MiCA would not only reduce these returns but also impose additional operational and regulatory burdens. Given its dominant market position and the global nature of its user base, Tether has little incentive to conform to a framework that undermines its profitability.

Moreover, Tether’s non-compliance is unlikely to significantly impact its market share. The U.S. and other crypto-friendly jurisdictions offer ample opportunities for growth, and the global demand for stablecoins shows no signs of waning. By focusing on markets with favorable regulations, Tether can continue to thrive without the constraints of MiCA.

The Broader Geopolitical Context

The regulatory divergence between the U.S. and Europe reflects broader geopolitical dynamics. The U.S. is leveraging stablecoins to reinforce the dollar’s dominance, while Europe’s approach appears more cautious, if not outright protectionist. This caution could be attributed to concerns about financial stability, but it also risks ceding ground to the U.S. in the rapidly evolving digital asset space.

China’s push for a digital yuan adds another layer of complexity. As global powers vie for influence in the digital economy, stablecoins backed by the dollar could serve as a counterweight to state-controlled digital currencies. By fostering a favourable regulatory environment, the U.S. is positioning itself as a leader in this new frontier, while Europe’s restrictive policies could leave it sidelined.

A Tale of Two Futures

The SEC’s decision to exempt fully collateralized stablecoins from securities classification marks a pivotal moment for the crypto industry. By providing clarity and reducing regulatory barriers, the U.S. is setting the stage for stablecoins to become a cornerstone of the digital economy. In contrast, Europe’s MiCA regulation risks stifling innovation and liquidity, potentially relegating the region to a secondary role in the global stablecoin market.

As the world moves toward a digital financial system, the stakes could not be higher. Stablecoins are not just a tool for traders; they are a strategic asset with implications for monetary policy, financial inclusion, and global economic power.

The U.S. has recognized this and is acting accordingly. Europe, however, must reconsider its approach if it hopes to remain competitive in the digital age. The choice is clear: embrace innovation or risk being left behind.

 

Source: https://intpolicydigest.org/the-diverging-paths-of-stablecoin-regulation-a-tale-of-two-continents/