Germany’s financial regulator (BaFin) has delivered a directive that halts public sales of the USDe stablecoin developed by Ethena GmbH. The stablecoin pegged to the dollar has been the subject of many regulatory issues, especially after the implementation of the European Union’s Markets in Crypto Assets (MiCA) regulations.
Regulatory Violations and MiCA Non-Compliance
According to BaFin, there are serious deficiencies in Ethena GmbH’s operations, most notably the firm’s failure to adhere to the established MiCA rules. BaFin cited some of the issues that have been raised, including asset reserves and capital violations. These regulations, which came into force in June 2024, require companies such as Ethena GmbH to seek proper regulatory approval before offering their products to the market.
Ethena GmbH had been issuing USDe tokens since June 2024, but they did not meet all the requirements set by MiCA. Even though the firm applied for approval under MiCA in early July 2024, BaFin dismissed the application. Their action was due to concerns about its business model and the fact that the firm had not met the EU asset reserve standards. Ethena GmbH’s stablecoin, USDe, was deemed insufficiently backed, thus being unsecured.
Freezing of USDe Reserves and Restrictions on New Customers
BaFin’s measures encompass the freezing of the reserve funds backing the USDe stablecoin. This action also blocks custodian Ethena GmbH from making more transactions or using the assets for other purposes. The company has also been ordered to cease operating its website and refrain from accepting new customers. This is part of the continuous process to ensure that the issuer complies with all the regulations set.
However, sales of the USDe token are not restricted to the secondary market. This means that USDe token holders can still engage in trading within decentralized platforms or private transactions, although the primary issuance has been halted.
Ethena’s Response and Future Plans
In a statement made after BaFin’s announcement, Ethena Labs stated that it is dissatisfied with such a decision but is ready to seek other regulatory models. The company also stated that its operations in other countries are still being carried out and that it remains committed to operating within the global legal requirements.
Ethena Labs also stated that the USDe reserves would be maintained and that the token could be redeemed through other entities, such as Ethena BVI Limited. Despite the rejection of its MiCA application, the company looks forward to applying and getting approval under a different legal framework.
Challenges for Synthetic Stablecoins and Their Regulation
Ethena USDe is a stablecoin that sustains its value in the market by combining the value of other assets like BTC and ETH. The company leverages perpetual futures positions to make a profit and rewards USDe stakers in return. However, people have also debated the stability of USDe due to its synthetic nature. BaFin’s decision reflects the increasing regulatory attention towards synthetic stablecoins and their compliance with the relevant legal requirements applicable in the EU.
Ethena’s case reveals the rather intricate nature of regulating cryptocurrencies in Europe, especially when BaFin tries to enforce MiCA and other financial rules. While industries are still interested in stablecoins there are challenges arising from regulation.
Ethena’s native token, ENA, has declined 5% following the announcement according to Coinmarket Cap data.
