World Liberty Financial's USD1 Stablecoin Faces EU Compliance Challenges

World Liberty Financial’s USD1 stablecoin, launched in late March, has garnered significant investor interest, achieving a market capitalization of over $128 million. However, to expand its reach, particularly in Europe, USD1 must navigate the stringent compliance requirements of the Markets in Crypto-Assets (MiCA) regulation.

Experts from Foresight Ventures, Kaiko, and Brickken emphasize the importance of substantial European bank reserves, operational volume caps to protect the euro, and transparent information to ensure compliance and avoid conflicts of interest.

World Liberty Financial (WLF), a decentralized finance (DeFi) project associated with the Trump family, aims to promote dollar dominance through USD1. The stablecoin has already surpassed a market capitalization of $128 million and reached a 24-hour trading volume of nearly $41.6 million. To establish dollar dominance globally, USD1 must outpace competitors like USDT and USDC and maintain a competitive edge against established currencies like the euro.

The European Union’s MiCA regulation, in effect for nearly four months, sets clear compliance demands for stablecoins. These include full reserve backing with liquid assets, strict reporting and transparency rules, and a cap of 1 million daily transactions for non-EU currency stablecoins. A significant portion of reserves (30% to 60%) must be held in EU-regulated banks.

The involvement of President Trump in USD1 has raised regulatory concerns, with lawmakers questioning the potential risks to the financial system. Senators have cautioned that allowing a president to benefit from a digital currency overseen by federal agencies could undermine public trust in regulatory processes.

According to Dessislava Ianeva-Aubert, Senior Research Analyst at Kaiko, USD1’s ability to apply for an operating license in the EU could be affected by unresolved conflicts of interest. WLF has not released sufficient public information on USD1 to assess its compliance effectively, particularly regarding measures to safeguard against market manipulation.

One of the biggest regulatory hurdles for USD1 in securing a MiCA license is the requirement to store a large portion of its reserves in a European bank. This mandate has proven challenging for established stablecoin issuers. Forest Bai, Co-founder of Foresight Ventures, suggests that USD1’s relatively small market size could work in its favor for MiCA compliance at this stage. However, as USD1 scales, other mandatory requirements could restrict its success.

MiCA includes transaction volume caps to safeguard the euro’s dominance. If a digital currency not denominated in euros becomes extensively adopted for daily payments within Europe, it could pose a risk to the EU’s financial sovereignty. MiCA places volume caps on transactions used as a means of exchange within the EU, requiring issuers to cease new issuance and present a remediation plan to the regulator if these limits are exceeded.

MiCA also prohibits stablecoins from offering any form of interest or benefit to holders based on the duration of their holdings, reinforcing their classification as payment instruments rather than investment vehicles. These limitations and volume caps may make Europe an undesirable target for USD1.

Given the circumstances, experts like Bai suggest that WLF might want to focus on countries with better market conditions for stablecoin issuers. The EU’s crypto market, with just 31 million users, may not justify MiCA compliance costs for projects like WLF. Other jurisdictions, such as Asia and Africa, offer more favorable conditions for stablecoin expansion.

With a crypto-friendly president in office, USD1 has sufficient backing to thrive in the US. However, the long-term viability of USD1 in the US depends on the development of supportive crypto regulations. Failure to comply with a comprehensive framework like MiCA could negatively impact USD1’s credibility and growth prospects.

According to Kaiko’s research, users are increasingly preferring regulated stablecoins. If USD1 cannot meet MiCA’s rules, it could be blocked from the EU market, limiting its growth and credibility among institutional users. Compliance with general stipulations concerning transparency, legal architecture, and real-time transaction oversight could be conducive to USD1’s eventual success.