German financial regulators have rejected Ethena Labs’ MiCA application. The regulator has ordered Ethena to halt EU operations, freeze its asset reserves, and prohibit any new services. Regulators claim that Ethena’s USDe will not be considered as unregistered securities.

Although USDe didn’t receive a MiCA approval previously, its application was submitted before the July 2024 deadline. Therefore, Ethena was allowed to offer USDe services until a decision was made.

Will EU Exchanges Delist Ethena’s USDe?

Ethena Labs, the issuer of the USDe stablecoin, is different from traditional stablecoins in a few key ways. It dubs this asset a “synthetic dollar,” correlating it with USD by financial derivatives and algorithmic mechanisms instead of a peg.

However, German financial authorities have taken issue with it and made a statement shutting down Ethena GmbH, its EU branch.

“The German financial supervisory authority BaFin has identified serious deficiencies in Ethena GmbH’s USDe token authorization process and ordered immediate action. Among other things, BaFin has prohibited Ethena GmbH from further offering its USDe token to the public and instructed the company to have the corresponding asset reserve frozen by the custodians,” it claimed.

Specifically, the German regulators have a few different issues with Ethena’s business practices. Many of them deal with MiCA, the EU’s new stablecoin regulations.

Ethena Labs does not have MiCA approval, but its GmbH spinoff submitted an application early enough to be grandfathered in. Today, regulators found “serious deficiencies” in the approval process.

German financial authorities claimed that Ethena GmbH is not in compliance with MiCA’s rules concerning stablecoin reserves or capital requirements. They also suspect that the firm is offering securities without the necessary prospectus.

To address this, they instructed Ethena GmbH to close business with new EU customers and not touch its asset reserve.

Ethena Labs quickly responded with its own statement. It claimed that Ethena GmbH, its main German office, is one of several “options and jurisdictions” it has been exploring for a global strategy.

Although it was disappointed by this ruling, it will continue exploring other options, particularly through offices other than Ethena GmbH.

“To be clear, the decision will in no way disrupt any current listings of USDe, or minting and redemption via Ethena (BVI) Limited (which services the vast majority of our mint users). Contrary to reports, no assets have been ‘frozen’ and all remain available for redemption. We will be revising our terms accordingly,” Ethena Labs stated.

Despite its impressive successes, Ethena Labs’ USDe token has plenty of serious opponents. Since its stablecoin doesn’t have a traditional peg, critics are concerned that a few flaws in its reserve metrics could cause the whole thing to collapse.

With this decision, EU exchanges will likely be compelled to delist Ethena’s USDe, much like what happened to Tether USDT.