Synthetic Stablecoin Issuer Ethena Labs Shuts Down Operations in Germany

Less than a month after the country's top financial regulator, BaFin, flagged compliance issues

Ethena Labs, the issuer of the synthetic stablecoin USDe, is shutting down its operations in Germany after the country’s top financial regulator, BaFin, flagged compliance issues with its products.

In an April 15 update, Ethena said it reached an agreement with BaFin to fully cease activities of its German subsidiary, Ethena GmbH. The firm also confirmed it will no longer seek authorization under the European Union’s Markets in Crypto-Assets Regulation (MiCA) in Germany.

“Following an application for authorization under the European Union’s MiCAR in Germany, and after a period of cooperation, BaFin has decided not to authorize Ethena GmbH and will close the transitional arrangement open under the European MiCAR regulation for a limited period of time,’ Ethena Labs said.

The move follows BaFin’s order on March 21 to halt all minting and redeeming of USDe in the country, citing legal concerns and possible securities law violations. Ethena clarified that since BaFin’s intervention, the German entity has not handled any transactions involving USDe.

“All whitelisted mint and redeem users previously interacting with Ethena GmbH have at their request been onboarded with Ethena (BVI) Limited instead and have no ongoing relationship with Ethena GmbH whatsoever,” the company said.

The Non-Traditional Peg Model Draws Scrutiny

Unlike conventional stablecoins such as Tether’s USDT and Circle’s USDC, which are backed by fiat reserves, Ethena’s USDe relies on a delta-neutral hedging strategy to maintain its dollar peg. The synthetic model includes a mix of spot holdings, onchain collateral, and liquidity buffers.

The firm’s unique approach to stablecoin maintenance has been a subject of scrutiny from regulators. In March, BaFin intervened in response to concerns over Ezena’s compliance with German financial regulations. The regulator’s move ultimately led to the suspension of USDe minting and redemption on March 21.

USDe is currently the fourth-largest stablecoin, with a circulating supply of $4.9 billion, according to CoinMarketCap. However, BaFin’s pushback and MiCA’s tighter rules are raising barriers for synthetic stablecoins in the EU.

Ethena GmbH used a transitional arrangement under the European MiCAR regulation, which allows cryptocurrency issuers to continue operations until they are granted or denied authorization, provided they apply by July 30, 2024. However, BaFin claims that Ethena GmbH began offering USDe in Germany on June 28, 2024, and distributed a big portion of its 5.4 billion USDe tokens outside Germany before this date.

Furthermore, BaFin maintains that Ezena applied for authorization to offer its services in several European Economic Area (EEA) states despite not having the necessary administrative, technical, and organizational capabilities to operate in such a large market.

The financial regulator also raised concerns about Ethena GmbH offering its Ethena Staked sUSDe token as a security without the required prospectus in Germany.

In response, Ethena Labs stated that no assets had been frozen and that BaFin’s move wouldn’t affect USDe’s listings or minting and redemption processes handled by the company’s subsidiary, Ethena BVI Limited.

“We are disappointed by the decision of the German Federal Financial Services Institution, BaFin, to close the transitional arrangement opened by BaFin for Ethena GmbH under the European MiCAR regulation and not to grant authorization for Ezena to operate in Germany,” the company said.

“We respect the decision of the German regulator and will continue to explore other options and work with regulators in other jurisdictions to provide innovative and compliant products and services to our users.”

Ethena Labs had been pursuing MiCAR authorization for its stablecoin, but with the application now set to be rejected, the firm plans to evaluate other options. USDe remains the third-largest USD-pegged stablecoin by market supply, behind USDC and USDT.

However, the USDe token carries some risks beyond those associated with traditional stablecoins. The token is backed by a delta-neutral position that balances a basket of staked ether derivatives with ether shorts on centralized exchanges. This setup generates a yield as long as funding rates remain positive, which has historically been the case.

The primary risk to USDe is if funding rates were to turn negative for an extended period, reducing the yield to zero or depleting its assets. Other risks include custodial counterparty risks associated with holding assets on centralized exchanges.

The MiCA regulation — which came into full effect in late 2024— imposes strict rules on stablecoin issuers operating in the EU. Issuers must hold fully backed reserves, keep those reserves segregated from users’ assets, and adhere to regular disclosures.

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