Germany's financial regulator BaFin has stopped Ethena GmbH, a subsidiary of Ethena Labs, from offering its USD-pegged stablecoin, USDe, in the country.

BaFin cited “serious deficiencies” in the authorization process for USDe and instructed the company to freeze its asset reserves tied to the stablecoin.

Germany’s financial regulator has stopped Ethena GmbH, a subsidiary of Ethena Labs, from offering its USD-pegged stablecoin, USDe, in the country.

According to a statement by BaFin, the move follows "serious deficiencies" in the authorization process for USDe and has seen the regulator instruct the company to freeze its asset reserves tied to the stablecoin.

Ethena GmbH had been using a transitional arrangement in 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.

Furthermore, BaFin noted that Ethena GmbH is offering its Ethena Staked sUSDe token as a security without the required prospectus in Germany.

In response, Ethena Labs said that no assets have been frozen and BaFin’s move won’t affect USDe’s listings or minting and redemption processes handled by its subsidiary, Ethena BVI Limited.

The company was disappointed by the decision and will 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 is the third-largest USD-pegged stablecoin by market supply, behind USDC and USDT. However, the token carries some risks that go 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.

With its rapid growth, Arthur Hayes, a key backer and the founding advisor of Ethena, predicts that USDe could soon hit $1 billion in TVL, positioning it as a competitor to the well-known stablecoin Tether.

The concept for USDe was inspired by Hayes’ “Dust on Crust” blog post, envisioning a stablecoin backed by crypto-native derivatives and operating outside the traditional banking system.

In addition to USDe, Ethena has also introduced a dollar-denominated “Internet bond,” a savings instrument that generates value through the staked version of USDe (sUSDe).

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