MiCA Won’t Save Us from a Stablecoin Crisis. It Might be Building One

The implementation of MiCA, Europe's new crypto regulation, intends to regulate stablecoins but has significant shortcomings. While it provides a framework aimed at preventing issuer collapses through proof-of-reserves and other capital rules, it fails to address broader systemic risks associated with integrating stablecoins into the financial system. As stablecoins gain legitimacy as mainstream payment instruments, they pose a risk to traditional banks and monetary sovereignty by potentially diverting deposits from banks into tokenized assets. The Bank of England has recognized these risks, suggesting strict regulations akin to those for banks and placing caps on stablecoin holdings. Moreover, the increasing regulatory arbitrage may drive issuers to seek less regulated environments, thus not eliminating risks but merely shifting them. MiCA, while bringing structured oversight, could inadvertently legitimize risk-laden practices and accelerate systemic entanglement without sufficient macro-prudential measures to manage the fallout of widespread stablecoin adoption.

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