MiCA Won’t Save Us from a Stablecoin Crisis

MiCA, Europe's new crypto regulation, was designed to regulate stablecoins and mitigate systemic risks associated with their adoption in the global financial system. However, while it introduces proof-of-reserves and other capital rules, critics argue it overlooks macro-prudential risks. As stablecoins gain mainstream acceptance, they may compete directly with traditional bank deposits, potentially destabilizing the credit creation system. The Bank of England has issued warnings about the potential threats of widespread stablecoin use, suggesting regulations akin to those applied to banks and proposing caps on holdings to mitigate risk. Regulatory arbitrage could also occur, pushing issuers to offshore jurisdictions despite the regulation, leading to a modern shadow banking system. Ultimately, while MiCA aims to create a regulated environment, it risks legitimizing stablecoins without adequately managing the risks associated with their integration into the financial system, potentially fostering a crisis rather than preventing one.

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