Stablecoin Regulations Could Pose Problems for Tether, JPMorgan Says; USDT Issuer Claims Sour Grapes

• Stablecoin regulations pose a threat to Tether's dominance, JPMorgan said in a report.
• Complying with MiCA means Tether may have to change its reserve management strategy, the bank said.
• Tether told CoinDesk in a response that "JP Morgan analysts seem to still have a fundamental misunderstanding about how our industry works."

UPDATE (Aug. 15, 19:08 UTC): Updates throughout to add Tether's comments.

Increasing regulation could pose a notable challenge for Tether, issuer of the largest stablecoin, USDT, which has dominated the crypto market in recent years, JPMorgan (JPM) said in a research report on Wednesday.

A stablecoin is a type of cryptocurrency that is usually pegged to the U.S. dollar, though some other currencies and assets such as gold are also used. USDT has a market cap of about $117 billion, more than three times that of its nearest rival, Circle's USDC.

JPMorgan notes that Markets in Crypto Assets (MiCA) legislation in Europe mandates that 60% of stablecoin reserves should be held with European banks.

"Given Tether's composition of reserves, complying with MiCA's stringent requirements could necessitate significant changes to its reserve management strategy," analysts led by Nikolaos Panigirtzoglou wrote.

The stablecoin issuer has previously been subject to regulatory scrutiny due to lack of transparency about the composition of its reserves, the bank said, adding that the "new regulations would intensify pressure on Tether to provide more detailed disclosure and audits."

Non-compliance with these new rules could threaten Tether's dominance in the stablecoin market, the report said.

Furthermore, JPMorgan said that stablecoin legislation in the U.S. is still pending, but when it is finally introduced, most likely in 2025, adoption is expected to increase, making the cryptocurrency more mainstream.

"U.S. compliant stablecoins stand to benefit, while non-compliant stablecoins would be challenged, potentially leading to consolidation in the industry," the report said.

However, Tether refuted JPMorgan's arguments and said the firm remains optimistic about how MiCA will impact the industry in the long term. "We recognize that the effects of these regulations, which will impact every stablecoin issuer, will unfold gradually. However, certain aspects of the regulation present challenges that could complicate the role of stablecoin issuers and increase the operational risks for EU-licensed stablecoins. Tether firmly believes that stablecoin regulations must ensure safety improvements rather than posing systemic risks," a Tether spokesperson told CoinDesk in a statement.

The stablecoin issuer also criticized how Wall Street firms such as JPMorgan view the digital assets sector. "JP Morgan analysts seem to still have a fundamental misunderstanding about how our industry works. Tether has been very public about our processes and risk management procedures, proving ourselves to be safer, more transparent, and more secure than recent history has shown traditional financial institutions themselves to be," the spokesperson said.

"While we are sure JP Morgan is enviously looking at Tether’s profit margins and frantically attempting to catch up in the crypto space, Tether remains committed to serving its 350 million customers worldwide and shaping the future of money," the statement added.

Read more: Tether's Stablecoin Dominance May Wane Following Proposed U.S. Rules: S&P