Ethena Exits Germany After BaFin Scrutiny Over USDe Stablecoin

Synthetic stablecoin issuer Ethena Labs is shutting down its operations in Germany, less than a month after the country’s top financial regulator, BaFin, flagged compliance issues with its USDe stablecoin.

In an April 15 update, Ethena said it reached an agreement with BaFin to fully cease activities of its German subsidiary, Ethena GmbH. The firm also confirmed it will no longer seek authorization under the European Union’s Markets in Crypto-Assets Regulation (MiCA) in Germany.

The move follows BaFin’s order on March 21 to halt all minting and redeeming of USDe in the country, citing legal concerns and possible securities law violations. Ethena clarified that since BaFin’s intervention, the German entity has not handled any transactions involving USDe.

“All whitelisted mint and redeem users previously interacting with Ethena GmbH have at their request been onboarded with Ethena (BVI) Limited instead and have no ongoing relationship with Ethena GmbH whatsoever,” the company said.

USDe’s Non-Traditional Peg Model Draws Scrutiny

Unlike conventional stablecoins such as Tether’s USDT and Circle’s USDC, which are backed by fiat reserves, Ethena’s USDe relies on a delta-neutral hedging strategy to maintain its dollar peg. The synthetic model includes a mix of spot holdings, onchain collateral, and liquidity buffers.

USDe is currently the fourth-largest stablecoin, with a circulating supply of $4.9 billion, according to CoinMarketCap. However, BaFin’s pushback and MiCA’s tighter rules are raising barriers for synthetic stablecoins in the EU.

Ethena GmbH used a transitional arrangement under the European MiCAR regulation, which allows cryptocurrency issuers to continue operations until they are granted or denied authorization, provided they apply by July 30, 2024. However, BaFin claims that Ethena GmbH began offering USDe in Germany on June 28, 2024, and distributed a big portion of its 5.4 billion USDe tokens outside Germany before this date.

BaFin also raised concerns about Ethena GmbH offering its Ethena Staked sUSDe token as a security without the required prospectus in Germany.

In response, Ethena Labs stated that no assets had been frozen and that BaFin’s move wouldn’t affect USDe’s listings or minting and redemption processes handled by the company’s subsidiary, Ethena BVI Limited. The company was disappointment over the decision but said it would continue to explore alternative regulatory frameworks.

Ethena Labs had been pursuing MiCAR authorization for its stablecoin, but with the application now set to be rejected, the firm plans to evaluate other options. USDe remains the third-largest USD-pegged stablecoin by market supply, behind USDC and USDT.

However, the USDe token carries some risks beyond those associated with traditional stablecoins. The token is backed by a delta-neutral position that balances a basket of staked ether derivatives with ether shorts on centralized exchanges. This setup generates a yield as long as funding rates remain positive, which has historically been the case.

The primary risk to USDe is if funding rates were to turn negative for an extended period, reducing the yield to zero or depleting its assets. Other risks include custodial counterparty risks associated with holding assets on centralized exchanges.

The MiCA regulation — which came into full effect in late 2024 — imposes strict rules on stablecoin issuers operating in the EU. Issuers must hold fully backed reserves, keep those reserves segregated from users’ assets, and adhere to regular disclosures.

So far, 10 euro-pegged and five dollar-pegged stablecoins secured MiCA approvals, according to Circle’s Patrick Hansen. Approved entities include Circle, Crypto.com, Société Générale, and Membrane Finance.

Tether, which dominates the $233 billion stablecoin market, opted out of the MiCA licensing process.