Europe’s landmark cryptocurrency regulation, MiCA, was intended to end the “wild west” of stablecoins. Reserve certification, capital controls, redemption requirements: On paper, this framework looks reassuring. However, in reality, MICA does little to prevent the systemic risks that may arise when stablecoins become part of the global financial ecosystem.
Ironically, regulations intended to contain risk may actually legitimize and embed risk.
The problem of contagion: When DeFi meets TradFi
Stablecoins have existed in the dark corners of finance for years as convenient cryptocurrencies for traders and senders. Now, with MiCA in force and the UK and US following suit, the lines separating crypto markets from the traditional financial system are beginning to fade. Stablecoins are evolving into mainstream, regulated payment methods that are reliable enough for everyday use. Newfound legitimacy changes everything.
This is because if stablecoins are trusted as money, they will compete directly with bank deposits as a form of private money. And as deposits move from banks to tokens backed by short-term government bonds, the traditional mechanisms of credit creation and monetary policy transmission begin to become distorted.
In this sense, MiCA solves the micro-prudential problem (ensuring issuers do not go bankrupt), but ignores the macro-prudential problem: what happens when billions of euros move from a fractional reserve system to a crypto wrapper?
Bailey’s warning and the BoE’s cap
The Bank of England clearly recognizes the risks. Governor Andrew Bailey told the Financial Times earlier this month that “widely used stablecoins should be regulated like banks”, even suggesting a central bank backstop for system issuers. The BOE is currently proposing caps on systemic stablecoin holdings of between £10,000 and £20,000 per person, and up to £10 million for businesses. This is a modest but obvious safeguard.
The message is clear. Stablecoins are more than just new payment tools. They are a potential threat to monetary sovereignty. A large-scale transition from commercial bank deposits to stablecoins could damage bank balance sheets, reduce confidence in the real economy, and complicate the transmission of interest rates.
In other words, even regulated stablecoins can become unstable at scale, and MiCA’s comfort blanket of reserves and reporting does not address that structural risk.
Regulatory arbitrage: the lure of offshore
Britain is taking a cautious path. While the FCA’s proposals are thorough for domestic issuers, they are significantly more generous for offshore issuers. The company’s own consultation acknowledged that consumers “remain at risk of harm” from foreign stablecoins used in the UK.
This is the core of an expanding regulatory arbitrage loop. As jurisdictions become more stringent, issuers will need to move offshore while still serving onshore users. In other words, risk does not disappear, it simply moves beyond the reach of regulators.
In effect, legal recognition of stablecoins reproduces the problem of shadow banking in a new way. In other words, money-like products circulate around the world, loosely supervised but systematically intertwined with regulated institutions and government bond markets.
MiCA’s blind spot: legitimacy without containment
MiCA deserves credit for bringing order to chaos. However, its structure is based on the dangerous assumption that proof of reserves is equivalent to proof of stability. it’s not.
Fully backed stablecoins could still trigger a fire sale of sovereign debt amid redemption panic. Liquidity shocks can still be amplified if holders treat them like bank deposits without deposit insurance or a lender of last resort. They still encourage currency substitution and improve the economy. de facto Dollarization with USD-denominated tokens.
By formally “celebrating” stablecoins as secure and monitored, MiCA effectively gives them legitimacy to scale without providing macro tools (such as issuance limits, liquidity features, resolution frameworks, etc.) to contain the impact of stablecoins after they scale.
The future of hybrid and why it’s fragile
Stablecoins sit right where DeFi and TradFi blur. They promise the frictionless freedom of decentralized rails while borrowing the reliability of regulated finance. This “hybrid” model is not inherently bad. Innovative, efficient and globally scalable.
But when regulators treat these tokens as just another asset class, they are missing the point. Stablecoins are not debt obligations of the issuer in the traditional banking sense. They are digital assets, a new form of assets that function like money. But as such assets gain widespread acceptance, stablecoins blur the line between private and public funds. It is precisely this ambiguity that has systemic implications that regulators can no longer ignore.
The Bank of England’s cap, the EU’s reserve certification, and the US’s GENIUS law all show that policymakers are aware of some of this risk. What remains, however, is a clear, system-wide approach that treats stablecoins as part of the money supply, rather than simply as tradable cryptoassets.
Conclusion: The MiCA paradox
MiCA is both a regulatory milestone and a turning point. Legalizing stablecoins will bring them into the mainstream of finance. By focusing on microprudential oversight, there is a danger of ignoring macro vulnerabilities and macroprudential concerns. And insisting on surveillance can accelerate global arbitrage and institutional entanglement. So rather than preventing the next crisis, MiCA may be quietly building one.