Tether Loses Its Dollar Peg as MiCA Regulations Take Effect, Raising Concerns Over Reserves

Stablecoin giant Tether has (slightly) lost its dollar peg on the last day of 2022, as new EU crypto regulations come into effect and reports unfold regarding potential USDT delistings from European exchanges.

The new MiCA regulations stipulate that stablecoin issuers must obtain specific licenses to continue issuing fiat-pegged digital currencies. However, Tether is yet to acquire the necessary ‘e-money license,’ which is required for any firm to issue electronic money in the EU.

To obtain this license, firms must be approved by the relevant national competent authority, which will assess the applicant’s compliance with the relevant EU laws. These laws include stipulations against money laundering and terrorist financing, as well as requirements for the firm to maintain sufficient liquid reserves and provide transparent whitepapers.

Furthermore, MiCA regulations dictate that stablecoins must maintain at least 83% of their reserves in deposits with an independent credit institution. This reserve requirement is intended to ensure the stability and liquidity of the stablecoin.

However, most of Tether’s reserves are reportedly comprised of U.S. government bonds, Bitcoin, Repo agreements, money market funds, and cash and bank deposits. This composition has raised concerns among some regulators and market participants, who argue that the reserves are not sufficiently liquid or transparent.

In October, the Wall Street Journal reported that Tether was being investigated by the Department of Justice over its reserves. The investigation is said to be focusing on whether Tether misled investors about the use of customer funds to cover losses in the crypto markets earlier this year.

As the set date for MiCA regulations arrived and brought news of potential USDT delistings, the stablecoin had an unusually poor trading day on December 30. Despite being designed to maintain a 1:1 ratio with the U.S. Dollar, USDT lost its peg slightly, enduring the lowest bearish streak for the year.

Data from CoinMarketCap shows USDT is currently valued at $0.9979 but reached as low as $0.9974 throughout the day. Moreover, its market capitalization took a hit of over $2 billion in the past 10 days, decreasing from around $140 billion to today’s market cap of roughly $138 billion. This marks the largest decrease in a bullish year ever for the stablecoin.