Europe’s landmark crypto regulation, MiCA, was intended to end the “wild west” era of stablecoins. Proof of reserves, capital rules, reimbursement requirements: on paper, the framework looks reassuring. However, in practice, MICA does little to prevent the kind of systemic risks that could arise once stablecoins become part of the global financial ecosystem.
The irony is striking: a regulation intended to contain risk may, in fact, be legitimizing and mainstreaming it.
The contagion problem: when DeFi meets TradFi
For years, stablecoins lived in the dark corner of finance: a cryptocurrency for traders and senders. Now, with MiCA in place, and the UK and US following closely behind, the line separating crypto markets from traditional financial systems is starting to blur. Stablecoins are evolving into conventional, regulated payment instruments, credible enough for everyday use. That new legitimacy changes everything.
This is because once a stablecoin is trusted as money, it directly competes with bank deposits as a form of private money. And when deposits migrate from banks to tokens backed by short-term government bonds, the traditional machinery of credit creation and monetary policy transmission begins to warp.
In this sense, MiCA solves a microprudential problem (ensuring that issuers do not collapse), but ignores a macroprudential one: what happens when billions of euros move from the fractional reserve system to cryptographic wrappers?
Bailey’s warning and the BoE limit
The Bank of England clearly sees the risk. Governor Andrew Bailey told the Financial Times earlier this month that “widely used stablecoins should be regulated like banks” and even hinted at central bank backstops for systemic issuers. The Bank of England is now proposing a limit of £10,000 to £20,000 per person and up to £10 million for companies with systemic stablecoin holdings – a modest but telling safeguard.
The message is clear: stablecoins are not just a new payment tool; They are a potential threat to monetary sovereignty. A large-scale shift of commercial bank deposits to stablecoins could undermine banks’ balance sheets, cut credit to the real economy and complicate rate transmission.
In other words, even regulated stablecoins can be destabilizing once they scale, and MiCA’s comfortable blanket of reserves and reporting does not address that structural risk.
Regulatory arbitrage: the offshore temptation
The UK has taken a cautious path. The FCA’s proposals are comprehensive with respect to domestic issuers, but notably lenient with respect to offshore issuers. Its own consultation admits that consumers will “remain at risk of harm” from foreign stablecoins used in the UK.
This is the core of a growing loop of regulatory arbitrage: the stricter a jurisdiction becomes, the more incentives issuers have to move abroad while still serving terrestrial users. That means the risk doesn’t go away, it simply moves beyond the regulator’s reach.
In effect, the legal recognition of stablecoins is recreating the shadow banking problem in a new form: money-like instruments circulating globally, lightly supervised, but systemically intertwined with regulated institutions and government bond markets.
The blind spot of MiCA: legitimacy without containment
MiCA deserves credit for imposing order on chaos. But its structure is based on a dangerous assumption: that the reserves test is equivalent to the stability test. It’s not like that.
Fully backed stablecoins can still trigger sovereign debt fire sales in a bailout panic. They can still amplify liquidity shocks if their holders treat them like bank deposits but without deposit insurance or a lender of last resort. They can still encourage currency substitution, pushing economies toward de facto dollarization through dollar-denominated tokens.
By formally “blessing” stablecoins as secure and supervised, MiCA effectively gives them legitimacy to scale without providing the macro tools (such as issuance limits, liquidity facilities, or resolution frameworks) to contain the consequences once they do so.
The hybrid future and why it is fragile
Stablecoins sit precisely where DeFi and TradFi now merge. They borrow the credibility of regulated finance while promising the frictionless freedom of decentralized railways. This “hybrid” model is not inherently bad; It is innovative, efficient and globally scalable.
But when regulators treat these tokens as just another asset class, they miss the point. Stablecoins are not liabilities of an issuer in the traditional banking sense; They are digital assets, that is, a new form of property that works as if it were money. However, once such ownership becomes widely accepted, stablecoins blur the line between private assets and public money. It is precisely this ambiguity that carries systemic implications that regulators can no longer ignore.
The Bank of England cap, the EU reserve test and the US GENIUS Act show that policymakers recognize parts of this risk. However, what still exists is a clear system-wide approach, which treats stablecoins as part of the money supply, not just as tradable cryptoassets.
Conclusion: the MiCA paradox
MiCA marks a regulatory milestone but also marks a turning point. By legitimizing stablecoins, you invite them to enter the financial mainstream. By focusing on microprudential supervision, there is a risk of ignoring macrofragility and macroprudential concerns. And by asserting oversight, it can accelerate global arbitrage and systemic entanglement. In short, MiCA may not be stopping the next crisis, but rather quietly building it.
