Why MiCA May Not Be the Solution to the Stablecoin Crisis

The introduction of MiCA, Europe's landmark crypto regulation, was intended to bring an end to the unregulated era of stablecoins. On paper, the framework appears robust, with features such as proof of reserves, capital requirements, and redemption rules. However, in practice, MiCA does little to mitigate the systemic risks that could arise when stablecoins become integrated into the global financial ecosystem. The irony is striking: a regulation designed to reduce risk may actually be contributing to its legitimization and amplification. The issue of contagion arises when DeFi and TradFi converge. For years, stablecoins operated on the fringes of finance, but with MiCA in place and the UK and US following suit, the line separating crypto markets from traditional financial systems is becoming increasingly blurred. As stablecoins gain acceptance as a mainstream payment method, they begin to compete directly with bank deposits as a form of private money. This newfound legitimacy has significant implications. Once a stablecoin is trusted as money, it competes with bank deposits, causing the traditional machinery of credit creation and monetary policy transmission to become distorted. MiCA addresses a micro-prudential issue by ensuring that issuers do not collapse, but it neglects a macro-prudential concern: the potential consequences of billions of euros shifting from the fractional-reserve system to crypto wrappers. The Bank of England recognizes this risk, with Governor Andrew Bailey suggesting that widely used stablecoins should be regulated like banks and hinting at central-bank backstops for systemic issuers. The BoE proposes a cap on holdings of systemic stablecoins, a modest but telling safeguard. The message is clear: stablecoins are not just a new payment tool, but also a potential threat to monetary sovereignty. A large-scale shift from commercial-bank deposits to stablecoins could undermine banks' balance sheets, reduce credit to the real economy, and complicate rate transmission. In other words, even regulated stablecoins can be destabilizing when they scale, and MiCA's reliance on reserves and reporting does not address this structural risk. Regulatory arbitrage is another concern, as the stricter a jurisdiction becomes, the more incentive issuers have to move offshore while still serving onshore users. This creates a loop where risk does not disappear, but rather relocates beyond the regulator's reach. The legal recognition of stablecoins is essentially 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. MiCA's blind spot lies in its assumption that proof of reserves equals proof of stability, which is not the case. Fully backed stablecoins can still trigger fire sales of sovereign debt in a redemption panic, amplify liquidity shocks, and encourage currency substitution. By formally recognizing stablecoins as safe and supervised, MiCA gives them legitimacy to scale without providing the necessary tools to contain the fallout. The hybrid model of stablecoins, which combines the credibility of regulated finance with the freedom of decentralized rails, is not inherently flawed, but it is fragile. When regulators treat these tokens as just another asset class, they miss the point. Stablecoins are digital assets that function like money, blurring the line between private asset and public money. This ambiguity carries systemic implications that regulators can no longer ignore. The Bank of England's cap, the EU's proof of reserves, and the US GENIUS Act all demonstrate that policymakers recognize parts of this risk. However, a clear, system-wide approach is still lacking, one that treats stablecoins as part of the money supply, not just as tradeable crypto assets. In conclusion, MiCA marks a regulatory milestone, but it also marks a turning point. By legitimizing stablecoins, it invites them into the financial mainstream, risks ignoring macro-fragility, and may accelerate global arbitrage and systemic entanglement. MiCA, in short, may not prevent the next crisis; it might be quietly building it.