Germany's BaFin Orders Ethena to Halt USDe Stablecoin Sales, Freeze Reserves

Germany's financial watchdog BaFin has ordered Ethena GmbH to immediately halt sales of its USDe stablecoin and freeze reserves, citing violations of the EU's Markets in Crypto-Assets Regulation (MiCAR). By Sam Reynolds. Updated April 18, 2024 at 1:13 a.m. PDT.

Germany’s financial watchdog, BaFin, has ordered Ethena GmbH to immediately halt sales of its USDe stablecoin and freeze the token’s reserves. The move comes after months of scrutiny over the project’s compliance with EU’s Markets in Crypto-Assets Regulation (MiCAR).

The March 21 directive follows an investigation that found Ethena GmbH to be in violation of MiCAR for selling USDe and sUSDe tokens without an approved prospectus. Moreover, BaFin identified potential violations of the German Securities Act, which could classify the tokens as unregistered securities.

In response to the breaches, BaFin instituted several measures, including freezing the reserves backing USDe, shutting down Ethena’s website and new client acquisition activities. However, secondary trading of Ethena’s tokens will remain unaffected by the regulator’s actions.

The regulator’s actions are pertinent to Ethena’s strategy of issuing most of its USDe tokens under transitional rules before MiCAR came into effect. However, despite the large issuance volume, Ethena failed to meet the updated standards for ongoing token sales after MiCAR’s launch.

According to a report by Blockware, Ethena’s reliance on transitional rules for pre-MiCAR token issuance was insufficient, as BaFin found the company’s compliance framework inadequate for the updated regulations in 2023.

This finding is critical as it impacts the broader narrative of EU regulators cracking down on stablecoin transparency. Notably, MiCAR mandates complete transparency in stablecoin резерв and capital requirements. These efforts are geared toward prioritizing investor protection.

What Ethena Has to Say About USDe

Ethena Labs responded to BaFin’s actions with a statement on X, where it expressed disappointment but maintained that USDe’s reserves are unaffected.

The company clarified that its British Virgin Islands (BVI) entity, Ethena BVI Limited, continues to provide services for USDe minting and redemption.

Ethena further emphasized its commitment to regulatory compliance, highlighting that most of the 5.4 billion USDe tokens in circulation were issued outside Germany before MiCAR rules came into effect. However, BaFin’s decision has raised questions about the firm’s preparedness for the updated regulations.

Since the beginning of our journey, Ethena has been diligently exploring various options and jurisdictions around the world in search of the most suitable regulatory frameworks for our business to thrive. As a result of our efforts, we have carefully established multiple entities within our structure in multiple jurisdictions to handle the minting and redemption of USDe tokens. A MiCAR application is currently pending with another EU regulator. We are actively working with the regulator to process the application in a timely manner. Despite this setback, we are now exploring other interesting regulatory avenues in the EU to continue parts of our business in the long term. Our British Virgin Islands entity will continue to mint and redeem USDe tokens, and the token's peg to the dollar remains stable. We are also employing an algorithmic strategy for hedging purposes, which contributes to maintaining the stability of the USDe peg.

Despite the setback, Ethena stated that it is exploring alternative regulatory frameworks to continue its operations. They said their British Virgin Islands (BVI) entity continues minting/redemption, claiming reserves are intact. The company also highlighted its reliance on algorithmic hedging to maintain USDe’s $1 peg, which has so far remained stable.

EU Stablecoin Rules Tighten Oversight

The EU’s MiCAR rules are set to increase scrutiny on stablecoins like USDe as part of broader efforts to safeguard users and financial systems. These tokens combine aspects of cryptocurrency with traditional money, sparking discussion about how best to ensure their safety and oversight.

Experts have pointed out potential issues with Ethena’s approach, noting that the algorithmic methods used by the firm to maintain USDe’s peg could fail during periods of severe market stress.

This factor is crucial as BaFin’s crackdown on Ethena showcases the EU’s broader focus on transparency in disclosed reserves and capital adequacy for stablecoins. These priorities are key components of MiCAR.

On a global scale, regulators are taking steps to adjust and tighten regulations. In the United States, new legislation demands full reserves for all stablecoins. Meanwhile, Singapore is tightening rules on crypto firms for better control over token sales and redemption. These moves are part of a broader effort to mitigate the nascent risks in crypto markets and ensure greater accountability.