Europe rolled out its big crypto rulebook, MiCA, with a clear goal: tame the wild frontiers of stablecoins. On paper, it looks solid. We see rules for reserves, capital requirements, and even how you get your money back. It all sounds rather reassuring, doesn’t it?
- While MiCA aims to regulate stablecoins, its focus on individual issuer stability might overlook broader systemic risks to the financial system.
- The regulation could inadvertently encourage offshore operations, creating regulatory blind spots and increasing the risk of global financial entanglement.
- MiCA’s approach of granting legitimacy without comprehensive systemic controls risks creating a new crisis by inviting stablecoins into the mainstream financial system.
But here’s the rub. What looks good on paper does not always play out that way in the real world. MiCA, for all its good intentions, might not stop the next big stablecoin shake-up. In fact, it could be quietly setting the stage for one.
When Crypto Meets Mainstream Finance
For a long time, stablecoins were a niche tool. They lived in the shadows, mostly for crypto traders and folks sending money across borders. Think of them as a quiet side street in the vast city of finance.
Now, with MiCA in place and places like the UK and US looking to follow, that side street is getting paved into a major highway. Stablecoins are becoming legitimate payment instruments. They are credible enough for everyday use. This newfound trust changes everything.
Once people trust a stablecoin as money, it starts to compete directly with your regular bank deposits. What happens when billions of euros decide to leave traditional banks? What if they instead move into tokens backed by short-term government bonds?
This shift warps the old machinery of credit creation. It also messes with how central banks try to control the economy through interest rates. MiCA addresses the small picture, making sure individual stablecoin issuers do not fall apart. But it misses the bigger picture: what happens to the whole financial system?
This is the difference between a micro-prudential problem (one issuer failing) and a macro-prudential one (the entire system wobbling). MiCA, it seems, focuses on the former while largely ignoring the latter.
The Bank of England’s Warning Shot
Some smart people see this risk clearly. Andrew Bailey, the Governor of the Bank of England, spoke to the Financial Times earlier this month. He said that widely used stablecoins should face the same rules as banks. He even hinted at central bank support for those stablecoins that become too big to fail.
The BoE is not just talking. It proposes a cap on how much systemic stablecoin a person can hold. This would be between £10,000 and £20,000. Businesses might hold up to £10 million. It is a modest limit, but it sends a strong message.
That message is plain: stablecoins are more than just a new way to pay. They could threaten a country’s control over its own money supply. A big move from bank deposits to stablecoins could hurt banks. It could cut off credit to businesses and families. It could also make it harder for central banks to manage interest rates.
So, even regulated stablecoins can cause trouble once they grow large. MiCA’s rules about reserves and reporting do not fix this deeper, structural risk. It is like putting a fresh coat of paint on a house with a shaky foundation.
The Offshore Loophole
The UK, for its part, has been careful. Its financial watchdog, the FCA, has strict plans for stablecoins issued at home. But it is surprisingly easy on those coming from overseas. The FCA even admits that consumers will still face harm from offshore stablecoins used within the UK.
This creates a growing problem. The tougher a country’s rules become, the more reason stablecoin issuers have to move their operations elsewhere. They can still serve users in the strict country, but from a distance. This means the risk does not disappear. It just moves to a place where regulators cannot reach it.
In a way, giving stablecoins legal recognition is bringing back an old problem, but in a new form. Think of it like shadow banking. These are money-like instruments circulating globally. They have light supervision, but they are deeply tied to regulated banks and government bond markets. It is a tricky situation.
MiCA’s Blind Spot: Trust Without Control
We should give MiCA credit for bringing some order to the crypto space. It is a step forward. But its whole design rests on a risky idea: that simply proving you have reserves means stability. It does not.
Even stablecoins that are fully backed can cause big problems. Imagine a panic where everyone wants to cash out their stablecoins at once. This could force a rapid sale of government bonds, causing prices to crash. This is what we call a fire sale.
These stablecoins can also make liquidity shocks worse. People might treat them like bank deposits, expecting them to be perfectly safe. But stablecoins do not have deposit insurance. There is no central bank standing by as a lender of last resort. If things go south, you are on your own.
They can also encourage currency substitution. This means people might start using USD-denominated stablecoins more than their local currency. This could lead to a country becoming, in effect, dollarized. It is a subtle but powerful shift.
By formally giving stablecoins its blessing, MiCA makes them seem safe and supervised. This gives them the green light to grow huge. But MiCA does not provide the big-picture tools needed to handle that growth. Things like limits on how many can be issued, ways to provide emergency cash, or plans for dealing with a collapse are missing.
The Blurry Future of Finance
Stablecoins sit right where the old world of traditional finance (TradFi) meets the new world of decentralized finance (DeFi). They borrow the trust of regulated finance. At the same time, they promise the easy, borderless freedom of crypto rails. This mix, this “hybrid” model, is not bad by itself. It is clever, efficient, and can work anywhere in the world.
But regulators often miss the point when they treat these tokens like any other asset. Stablecoins are not just a debt owed by an issuer, like a bank loan. They are digital assets, a new kind of property. This property acts just like money.
Once this digital property becomes widely accepted, stablecoins blur the line between a private asset and public money. This unclear status carries big risks for the entire financial system. Regulators can no longer ignore this ambiguity.
The Bank of England’s cap, MiCA’s reserve rules, and even the U.S. GENIUS Act show that policymakers see parts of this risk. What is still missing, however, is a clear, system-wide plan. We need an approach that treats stablecoins as part of the money supply, not just as tradeable crypto assets.
MiCA is a big step in regulation, but it is also a turning point. By making stablecoins legitimate, it invites them into the financial mainstream. By focusing on the small-scale supervision, it risks overlooking the bigger, systemic weaknesses. And by trying to oversee things, it might just speed up global arbitrage and financial entanglement. MiCA, in short, might not prevent the next crisis. It could be quietly building it.
