Europe’s landmark crypto regulation, MICA, is meant to end the “Wild West” era of StableCoins. Proof-of-Reserves, Capital Rules, Redemption Requirements: On paper, the framework looks sound. However, in practice, MICA does little to prevent the kind of systemic risks that may arise once stablecoins become part of the global financial ecosystem.
The paradox is striking: a regulation meant to contain risk can, in fact, be legitimate and embed it.
The contagion problem: When Defi meets Tradfi
For years, StableCoins lived in the dark corners of finance: a crypto comfort for traders and remitters. Now, with MICA going strong, and the UK and US following close behind, the line separating crypto markets from traditional financial systems is starting to fade. StableCoins are evolving into regulated, mainstream payment instruments, credible enough for everyday use. The new 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 when deposits move out of banks and into tokens backed by short-term government bonds, the traditional machinery of credit creation and monetary-policy delivery begins to warp.
In this sense, MICA solves a micro-prudential problem (ensuring that issuers do not collapse) but ignores a macro-prudential one: what happens when billions of euros move from the fractional-reserve system to crypto wrappers?
Bailey’s Warning, and Boe’s Cap
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 BOE now proposes a £10,000-£20,000 cap per person and up to £10 million for businesses on holdings of systemic stablecoins: a modest but revealing safeguard.
The message is simple: StableCoins is not just a new payment tool; They are a potential threat to financial sovereignty. A large scale shift from commercial-bank deposits to StableCoins could damage banks’ balance sheets, cut credit to the real economy, and complicate rate transmission.
In other words, even regulated stablecoins can be stable once they scale, and the blanket comfort of reserves and reporting does not determine the risk structure.
Regulation Arbitrage: The Offshore Temptation
The UK has taken a cautious path. The FCA’s proposals are intensive towards domestic issuers but are notably permissive towards offshore ones. Its own consultation admitted consumers ‘remain at risk of harm’ from overseas stablecoins used in the UK.
This is the core of a growing regulation of regulatory arbitrage: the stricter a jurisdiction becomes, the more incentives providers have to move offshore while still serving onshore users. This means the risk doesn’t disappear, it just moves beyond the reach of the regulator.
By virtue of this, the legal recognition of StableCoins has returned to the problem of shadow reduction in a new form: as money-like instruments circulating around the world, lightly supervised, but systematically linked to regulated institutions and government bond markets.
Mica’s Blind Spot: Legitimacy without provision
MICA deserves credit for imposing order on chaos. But its structure rests on a dangerous assumption: that proof-of-reserve equals proof-of-stability. Nope.
Fully-backed stableCoins can still trigger fire sales of sovereign debt in a panic redemption. They can still amplify liquidity shocks if holders treat them like bank deposits but not an insurance deposit or a lender of last resort. They can still encourage currency exchange, pushing economies towards In fact dollarization through USD-denominated tokens.
By formally ‘blessing’ StableCoins as safe and regulated, MICA effectively gives them legitimacy at scale without providing macro tools (such as issuance limits, liquidity facilities, or resolution resolutions) to contain collapses once they do.
The hybrid future, and why it is fragile
StableCoins sit precisely where Defi and Tradfi have faded. They borrow the credibility of regulated finance while promising the frictionless freedom of decentralized rail. 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; These are digital assets, namely a new form of asset that functions like money. But once such property was widely accepted, StableCoins blurred the line between private property and public currency. It is certain that the ambiguity that carries the systemic implications of the regulators can no longer be ignored.
The Bank of England’s Cap, the EU’s proof-of-resort, and the US Genius Act all show that policies recognize these areas of risk. What’s more, though, is a clear, system-wide approach, one that treats StableCoins as part of the money supply, not just like traditional crypto assets.
Conclusion: Paradox of MICA
MICA marks a regulatory milestone but also marks a turning point. By legitimizing StableCoins, it is being invited into the financial mainstream. By focusing on micro-prudential oversight, there is a risk of overlooking macro-fragility and macro-prudential concerns. And by taking into account the administration, it can accelerate global arbitration and systematic seizure. Mica, in short, may not stop the next crisis, may quietly build it.
