MiCA Won’t Save Us from a Stablecoin Crisis

The Markets in Crypto-Assets (MiCA) regulation, designed to manage the risks associated with stablecoins, raises concerns about its actual effectiveness. While it provides a framework with proof-of-reserves and capital rules, it does not adequately address systemic risks as stablecoins begin to merge with traditional finance. According to the Bank of England, there is a significant danger that stablecoins could threaten monetary sovereignty by encouraging the movement of deposits away from banks, destabilizing credit flow. Furthermore, MiCA's regulatory approach might lead to a regulatory arbitrage, pushing issuers to operate offshore while serving onshore users. This could replicate shadow banking issues, with lightly regulated money-like instruments interwoven with regulated markets. MiCA presumes that proof-of-reserves equates to stability; however, fully-backed stablecoins could still cause market panic and liquidity shocks. Therefore, while MiCA aims to bring legitimacy to stablecoins, it might instead amplify risks as these instruments gain traction in the financial ecosystem without appropriate macro-prudential measures.

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