Europe’s landmark crypto regulation, MiCA, was intended to end the “Wild West” era of stablecoins. Proof of reserves, capital rules, redemption requirements: On paper, the framework looks reassuring. Yet, in practice, MICA does little to prevent the kind of systemic risks that can emerge when stablecoins become part of the global financial ecosystem.
The irony is striking: a regulation meant to contain risk may in fact legitimize and embed it.
The contagion problem: when DeFi meets TradFi
For years, stablecoins lived in the dark corner of finance: a crypto-convenience for traders and issuers of money. Now, with MiCA in effect and the UK and US following closely behind, the line separating crypto markets from traditional financial systems is beginning to fade. Stablecoins are evolving into regulated, mainstream payment instruments, trustworthy enough for everyday use. The newfound legitimacy changes everything.
This is because once a stablecoin is trusted as money, it competes directly with bank deposits as a form of private money. And as deposits migrate out of banks and into tokens backed by short-term government bonds, the traditional machinery of credit creation and monetary policy transmission begins to distort.
In this sense, MiCA solves a microprudential problem (ensuring that issuers don’t collapse) but ignores a macroprudential problem: What happens when billions of euros switch from fractional reserve system to crypto wrappers?
Bailey’s warning and the BoE’s cap
The Bank of England sees the risk clearly. 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 BoE is now proposing a cap of £10,000-£20,000 per person and up to £10 million for companies holding systemic stablecoins: a modest but revealing protection.
The message is clear: stablecoins are not just a new payment tool; they are a potential threat to monetary sovereignty. A large-scale shift from 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 comfort blanket of reserves and reporting does not address that structural risk.
Regulatory arbitrage: the offshore temptation
Britain has taken a cautious path. The FCA’s proposals are thorough for domestic issuers, but particularly lenient for offshore issuers. Its own consultation admits that consumers ‘will remain at risk of harm’ from overseas stablecoins used in the UK.
This is at the heart of a growing regulatory arbitrage loop: the stricter a jurisdiction becomes, the more incentive issuers have to move offshore while still serving onshore users. This means that the risk does not disappear, it is simply moved beyond the regulator’s reach.
Indeed, the legal recognition of stablecoins recreates the shadow banking problem in a new form: money-like instruments that circulate globally, easily monitored but systemically intertwined with regulated institutions and government bond markets.
MiCA’s blind spot: legitimacy without containment
MiCA deserves credit for bringing order to chaos. But its structure rests on a dangerous assumption: that proof-of-reserves equals proof-of-stability. It does not.
Fully supported stablecoins can still trigger fire sales of sovereign debt in a redemption panic. They can still compound liquidity shocks if holders treat them like bank deposits, but without deposit insurance or a lender of last resort. They can still encourage currency substitution and push economies towards de facto dollarization through USD-denominated tokens.
By formally ‘blessing’ stablecoins as safe and supervised, MiCA gives them real legitimacy to scale without providing macro tools (such as issuance limits, liquidity facilities or settlement frameworks) to limit the fallout once they do.
The hybrid future and why it is fragile
Stablecoins sit exactly where DeFi and TradFi are now blurring. They lend the credibility of regulated finance while promising the frictionless freedom of decentralized rails. 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 obligations of an issuer in the traditional banking sense; they are digital assets, namely a new form of property that functions as if it were money. But as such property becomes widely accepted, stablecoins blur the line between private assets and public money. It is precisely this ambiguity that has systemic implications regulators can no longer ignore.
The Bank of England’s ceiling, the EU’s proof-of-reserves and the US GENIUS Act all show that politicians recognize parts of this risk. What remains, however, is a clear, system-wide approach, one that treats stablecoins as part of the money supply, not just tradable crypto-assets.
Conclusion: MiCA’s paradox
MiCA marks a regulatory milestone, but also marks a turning point. By legitimizing stablecoins, it invites them into the financial mainstream. By focusing on micro-prudential supervision, it risks ignoring macro-fragility and macro-prudential concerns. And by asserting oversight, it can accelerate global arbitrage and systemic entanglement. MiCA may not stop the next crisis, it may quietly build it up.
