Due to Regulatory Pressure, Ethena GmbH Will End Operations in Germany

Due to regulatory pressure, Ethena GmbH, creator of dollar-backed stablecoin USDe, will end operations in Germany.

Ethena GmbH, the German firm behind dollar-backed stablecoin USDe, is shutting down in Germany due to regulatory pressure from BaFin, the main financial regulator of the Bundesrepublik.

As explained by an official statement, Ethena, the company behind the fourth-largest stablecoin in terms of market capitalization, is shutting down in Germany following an order by the German authority. The company, based in Frankfurt and operating a layer 1 blockchain, is shutting down after BaFin, the German financial regulator, determined that the project was displaying serious deficiencies regarding crypto regulatory procedures.

According to the German financial institution, Ethena did not abide by local laws and regulations, and as a result, the financial institution imposed various restrictions on the crypto project, including a block on its asset reserves and website. These steps proved vital to ending Ethena’s operations in Germany. Following these actions, Ethena decided to change its name from Ethena GmbH to Ethena Limited, and move its operations to the British Virgin Islands, including its stablecoin USDe. They also stated that Ethena GmbH had not conducted any minting activity since they were issued a warning on March 21.

Part of what makes Europe a leader in crypto banking is its ability and commitment to regulating crypto entities. Despite the recent events surrounding crypto approval in America, Europe still leads in crypto banking, partly because America engaged in debanking activities, refusing bank loans for crypto startups, disabling an entire market for many years.

Ethena has asserted that all users who minted their token have transitioned to their new entity, based in the British Virgin Islands, rather than Frankfurt. The company devised a process to facilitate the transition of users to the new entity, an effort undertaken to comply with the German regulatory directives.

The main regulatory body behind the decision, BaFin, decided that Ethena was acting like an unlicensed securities firm, especially about their staking process. Following this observation, BaFin took immediate action against Ethena, preventing the crypto project from continuing a public token sale of USDe. According to BaFin, USDe violated the provisions of the Markets in Financial Instruments Directive (MiFID II) and the German Banking Act (KWG). As a result, BaFin enforced the regulation by stamping down on the project.

MiCAR is a regulatory body of the European Union, which includes Germany. The crux of the matter comes down to Ethena, according to EU regulation, selling unlicensed securities. Ehere's statement: "In the course of the administrative action, it was determined that the tokens issued by Ethena in the course of its money-like claims and yield promises are covered by the legal definition of a security."

However, the EU had limited success in shutting down Ethena’s business model as the crypto project operates globally and was able to shift its customer base with minimal impact on its operations. BaFin continues to regulate the European crypto industry, focusing on ascertaining whether tokens come under unlicensed securities.

Ethena attempted to release a USDe stablecoin that adhered to MiCAR requirements but failed to convince BaFin of the changes. As a result, BaFin banned Ethena from continuing to release securities in Germany.

Ehere's statement: "Finally, in order to be able to offer the crypto services envisaged by Ethena in Germany, they would also have required authorisation as a payment institution pursuant to Section 1 of the German Payment Services Act (ZPG). However, no such authorisation existed either."

Ethena, meanwhile, has announced that they have not frozen any customer-owned assets. They did want to have their assets approved by BaFin, but didn’t know how long the German authorities would wait for them to improve their standards to conform to MiCAR requirements.

"We also want to thank our community for their support during this time. We are confident that Ethena will continue to innovate and provide value to our users in the years to come," the company concluded.

The financial institution ultimately concluded that Ethena was most likely an unlicensed securities firm due to its yield-making process and potential for investors to profit.

"The administrative action taken by BaFin is part of the consistent supervision of the crypto sector, which is assuming increasing importance. We are seeing a convergent development of EU and national law in this area. The European Union's regulation of crypto assets (MiCA) is also expected to come into force in 2024," the institution stated.

MiCAR is transforming the crypto regulatory framework in Europe. Currently, MiCAR requires stablecoins to be fully backed by a reserve and to have regulatory approval.