The landmark European crypto regulation, MiCA, was supposed to end the “Wild West” era of stablecoins. Proof of reserves, capital rules, redemption requirements: on paper, the framework seems reassuring. Yet 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: regulation supposed to contain risk can, in fact, legitimize and integrate it.
The problem of contagion: when DeFi meets TradFi
For years, stablecoins have lived in the dark corner of finance: a crypto commodity for traders and money senders. Now, with MiCA coming into force, closely followed by the UK and US, the line separating crypto markets from traditional financial systems is starting to blur. Stablecoins are evolving into regulated and mainstream payment instruments, credible enough for everyday use. This newfound legitimacy changes everything.
This is because once a stablecoin is considered 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 mechanisms of credit creation and monetary policy transmission begin to distort.
In this sense, MiCA solves a micro-prudential problem (by ensuring that issuers do not collapse) but ignores a macro-prudential problem: what happens when billions of euros move from the fractional reserve system to crypto envelopes?
Bailey’s warning and the BoE ceiling
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 guarantees 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 telling safeguard.
The message is clear: stablecoins are not just a new payment tool; they pose a potential threat to monetary sovereignty. A large-scale shift from commercial bank deposits to stablecoins could weaken bank balance sheets, reduce 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 this structural risk.
Regulatory arbitrage: the offshore temptation
The UK has taken a cautious approach. The FCA’s proposals are thorough with respect to domestic issuers, but particularly permissive with regard to offshore issuers. Its own consultation admits that consumers will “remain exposed to risk” from foreign stablecoins used in the UK.
This is the heart of a growing loop of regulatory arbitrage: the stricter a jurisdiction becomes, the more incentive there is for issuers to set up operations abroad while continuing to serve domestic users. This means that the risk does not disappear, it simply moves out of the regulator’s reach.
In effect, the legal recognition of stablecoins recreates the problem of shadow banking in a new form: money-like instruments circulating globally, lightly supervised, but systematically linked to regulated institutions and government bond markets.
The dead center of MiCA: legitimacy without confinement
MiCA deserves credit for imposing order out of chaos. But its structure rests on a dangerous assumption: that proof of reserves is equivalent to proof of stability. This is not the case.
Fully collateralized stablecoins can still trigger sovereign debt firesales in the event of a buying panic. They can further amplify liquidity shocks if their holders treat them like bank deposits but without deposit insurance or lender of last resort. They can still encourage currency substitution, pushing economies towards de facto dollarization via USD-denominated tokens.
By formally “blessing” stablecoins as safe and supervised, MiCA effectively gives them legitimacy to evolve without providing the macro tools (like issuance limits, liquidity facilities, or resolution frameworks) to contain the fallout once they do.
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 railroads. This “hybrid” model is not bad in itself; it is innovative, efficient and globally scalable.
But when regulators treat these tokens as just another asset class, they miss the point. Stablecoins do not constitute a liability 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. Yet once this property becomes widely accepted, stablecoins blur the line between private assets and public money. It is precisely this ambiguity that leads to systemic implications that regulators can no longer ignore.
The Bank of England cap, EU reserve evidence and the US GENIUS Act all show that policymakers recognize some of this risk. However, this is still a clear system-wide approach, which treats stablecoins as part of the money supply, not just tradable crypto assets.
Conclusion: the MiCA paradox
MiCA marks a regulatory step but also marks a turning point. By legitimizing stable coins, it invites them to enter the financial mainstream. By focusing on microprudential supervision, it risks ignoring macrofragility and macroprudential concerns. And by asserting surveillance, it could accelerate global arbitrage and systemic entanglement. In short, MiCA may not stop the next crisis, rather it could quietly build it.
