Tether (USDT) Loses Ground in the Market: the MiCA Regulation Pushes the Stablecoin Down by 1%

Stablecoin Tether (USDT) has seen a 1% loss in capitalization over the past week due to the effects of MiCA.

This translates to a drop of $1.46 billion, coming after two other negative weeks, for a total loss of $2.9 billion from the peak of December 21st.

Investors are spooked by the new European "Market in Crypto Assets" (MiCA) regulation, and are shifting their liquidity elsewhere.

Some exchanges in the European Union are choosing to delist USDT due to compliance issues.

For example, Coinbase recently delisted the asset for its European users, leading to FUD about USDT being "banned" in Europe.

Over the past 3 weeks, USDT has lost a total of 2.3% of its market-cap, while still remaining pegged to $1.

MiCA came into effect on December 30th, 2024, and requires crypto asset issuers to have a specific license to offer or publicly trade ART or EMT tokens.

An ART is a currency that aims to maintain a stable value relative to another asset, such as gold or fiat currencies, while an ERT replicates the value of a single national currency, like USDT.

MiCA specifies that only authorized banks and financial intermediaries can trade ERT tokens to European customers.

Specifically, these tokens, like USDT, must be supervised by the European Banking Authority (ABE) and must deposit collateral assets with a credit institution in the EU.

With MiCA, the stablecoin USDT is effectively made illegal within the Eurozone, although the majority of its trading volume occurs elsewhere.

According to crypto analyst Bitblaze, Asia holds the largest market share, minimizing the impact of the delistings mandated by the new regulation.

The negative blow to Tether in the markets could be part of a temporary FUD that is destined to dissolve.

USDT records biggest drop since FTX collapse: what does it mean for bull and bear markets?

As mentioned, the drop in USDT marks the biggest loss since November 2022, during the collapse of the FTX exchange.

At the time, the cryptocurrency lost 4.32% of its capitalization in just one week, which corresponded to an outflow of $3 billion.

Another similar occasion where USDT experienced a severe drawdown was in May 2022, during the Terra-Luna bubble.

In both cases, the drop in the stablecoin coincided with an event that turned out to be the catalyst for a major move.

In May 2022, as USDT lost ground, the arrival of the bear market on Bitcoin and the entire crypto sector became evident.

In November of the same year, the last bearish phase of Bitcoin's cycle began, anticipating the subsequent bull market.

This time, however, USDT's troubles may not have a significant impact like on those past occasions. 

The market scenario is notably different compared to 3 years ago, and Tether's capitalization is now much larger.

This drop in USDT is unlikely to be the prelude to a new bear market, given the many positive factors in the market.

At the same time, we cannot yet claim to be facing a new bull market, since we are still in the midst of a bull cycle that began several months ago.

What happened to USDT appears as an atypical drop in capitalization in the current scenario, triggered by the FUD of the MiCA regulation and by the uncertainty of investors towards a phantom ban in Europe.

In any case, nothing worrying, nor particularly exciting, for the short-term future of the bull and bear crypto speculative markets.

Shifting landscape in the stablecoin sector: MiCA favors USDC

If USDT seems to be penalized by the MiCA regulation, another stablecoin is gaining positive traction: USDC.

The latter emerges as a "MiCa compliant" coin since it meets all the constraints of the new regulation, such as depositing at least 60% of the reserves with suitable European banking institutions.

Over the past 3 weeks, USDC has recorded a trend opposite to its competitor stablecoin, adding $1.7 billion in capitalization.

To be precise, Circle's currency has been growing since the beginning of 2024, when there was already talk about the potential effects of MiCA, even though during the same period USDT also rose significantly.

Now it is possible that the euphoria for USDC may cool down, bringing capital back to the more widely traded USDT.

It's worth noting that USDT is the largest stablecoin in the entire crypto sector, with a value of holdings amounting to $137.3 billion.

USDC, in comparison, has a market cap of "only" $43.7 billion, less than a third of the first place holder.

On the Ethereum blockchain, Paolo Ardoino's (CEO of Tether