Circle Tightens Grip on Stablecoin Payment Market as Tether Opts Out of Approval
Circle won the race to become the first MiCA-compliant stablecoin issuer. Photo by Vince Caligiuri/Getty Images.
Key Takeaways
- Circle’s USDC and EURC have emerged as the first MiCA-compliant stablecoins.
- The successful MiCA license reflects Circle’s strong emphasis on regulatory compliance.
- Meanwhile, Tether has said it has no plans to pursue MiCA approval.
- The diverging strategies reflect the two company’s different stablecoin visions.
Having received the first license to issue stablecoins under the EU’s Markets in Crypto Assets (MiCA) regulation, Circle has consolidated its position as the leading regulated stablecoin firm.
Reflecting a wider story about the effects of crypto regulation on market dynamics, Circle’s victory is Tether’s loss (not to mention smaller firms who will struggle to meet the costs of MiCA compliance).
How Circle Won the Race to Regulatory Compliance
While the global stablecoin market isn’t strictly a two-horse race, it has long been dominated by Circle and Tether.
In an era of rising stablecoin regulation, the two issuers have diverged in their approach to compliance.
On the one hand, Circle has cast itself as the regulatory-friendly option, proactively investing in anti-money laundering (AML) technology and severing ties with Tron, which it deemed a compliance risk.
On the other, Tether has taken more of a reactive approach, complying with regulations on an as-needed basis. Over the years, this has made Tether more than a few enemies, with lawmakers and regulators on both sides of the Atlantic calling the company out for alleged sanctions violations and AML failures.
Tether Stubborn in Face of Mounting Stablecoin Regulation
In a recent interview , CEO Paolo Ardoino said the company had no immediate plans to gain approval under the MiCA framework. “At Tether, what particularly bothers us about [MiCA is] the very strong constraints on how you can manage your reserves,” he explained.
Specifically, he condemned the requirement that “systemic” issuers like Tether must keep 60% of their reserves in bank deposits, arguing that this would threaten the firm’s ability to fulfill redemptions and expose it to bankruptcy risk.
According to Tether’s latest attestation report , just 0.1% of its total reserves are kept in bank deposits, with the majority held in US Treasury Bills and Overnight Repo Facilities.
With the consequences of facilitating trades in unregulated stablecoins not yet clear, in the runup to the new MiCA rules coming into force on June 30, OKX delisted USDT in the EU.
While the move sparked concerns that other exchanges could also drop support for USDT, no mass delisting followed. But with the deadline for crypto exchanges to comply with their own MiCA requirements looming, USDT’s future in the EU remains uncertain.
Outside of the EU, Tether’s dominance is also threatened by Circle’s compliance edge. For example, a proposed bill in the US could significantly restrict the use of stablecoins issued by offshore entities.
Crypto Trading vs. Payment Stablecoins
While Circle may be winning the global compliance race, USDT dominance remains high, with the asset accounting for 69.6% of the total stablecoin market as of June 7.
Tether’s ongoing relevance can be put down to its deep roots in cryptocurrency markets. Across almost every major exchange, USDT is the preferred stablecoin for crypto trading, providing much deeper liquidity than USDC.
But USDC’s share of trading volumes has been trending upward. According to a report by Kaiko, the percentage of stablecoin trades on centralized exchanges that used USDC climbed from less than 1% in 2020 to 11% in April 2024.
But perhaps more importantly, Circle is less focused on crypto trading and is instead placing its bets on the emerging market for stablecoin payments.
Compared to cash, card schemes, digital wallets and other payment channels, stablecoins make up just a tiny fraction of the global payments market. However, the support of major FinTech players like Stripe could change this.
Having forged a partnership with Circle in April, Stripe is integrating USDC payments across millions of websites that use its platform. If just a fraction of the $1 trillion worth of transactions the company processed in 2023 are converted to stablecoin payments, it could provide Circle with an unprecedented adoption boost that eclipses the entire crypto trading market.
MiCA Challenges
For Circle, emerging stablecoin regulations could pave the way for more widespread adoption by increasing trust in the technology. But when it comes to MiCA there is an important caveat.
While the legislation doesn’t impose limits on crypto trading or DeFi activity, it does restrict the use of non-euro-denominated stablecoins to pay for real-world goods or services.
If USDC payments cross a threshold of 1 million transactions or €200 million per day, Circle will be forced to stop issuing new coins, threatening the company’s payment plans.
What impact this will have on the company’s long-term prospects in the EU remains to be seen. The transaction limits were designed to prevent stablecoins from threatening the region’s monetary sovereignty and could serve to accelerate the adoption of Circle’s euro-backed EURC.
Up until now, there has been little demand for non-dollar stablecoins. And if the EU goes ahead with its plans to launch a Central Bank Digital Currency (CBDC), they may never take off.
As the global stablecoin market evolves, Circle is currently winning the compliance race. But if retail payments represent the future of stablecoins, the company still needs to navigate some key challenges.
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