Ongoing Challenges and Broader Context

Introduction

While the Markets in Crypto-Assets Regulation (MiCA) represents a landmark achievement in creating a harmonised EU framework for stablecoins and other crypto-assets, its introduction is not the endpoint for regulatory and market evolution. The law is designed to provide clarity and protect the European financial system, but in doing so, it also exposes new tensions, operational challenges, and unresolved risks.

This module examines these ongoing issues, focusing on regulatory loopholes, systemic vulnerabilities, and market dynamics that remain uncertain. It also places MiCA in a global context, assessing how it compares to other regulatory approaches and how its influence may extend beyond the EU’s borders.

Regulatory Loopholes and Fungibility Risks

One of the most discussed challenges in the early stages of MiCA’s implementation is the potential for regulatory arbitrage, where issuers structure operations to exploit gaps or inconsistencies in the rules.

A prime example is the practice of offering both a MiCA-compliant stablecoin for EU customers and an unregulated version for other markets, with the two versions remaining fully fungible. In theory, fungibility allows tokens to flow between compliant and non-compliant environments, potentially reintroducing risks that MiCA was designed to mitigate. For instance, if a run on the non-compliant version undermines issuer reserves, EU customers could be indirectly affected despite holding “regulated” tokens.

The European Banking Authority (EBA) and national competent authorities have acknowledged this risk. They have signalled that they may use supervisory powers to restrict the circulation of compliant tokens that remain linked to unregulated counterparts, particularly in cases involving significant EMTs or ARTs with systemic importance.

Market Concentration and Competitive Pressures

MiCA’s compliance requirements, licensing, reserve audits, redemption guarantees, governance standards, are resource-intensive. While this raises the quality and transparency of issuers, it also creates significant barriers to entry. Smaller fintech start-ups may find it prohibitively expensive to secure authorisation, establish EU-based custodial arrangements, and maintain the level of liquidity and reporting required.

This dynamic risks consolidating the market in the hands of a few large issuers with the financial capacity to maintain compliance. On one hand, concentration can improve stability by limiting the market to trusted players; on the other, it may reduce competition, innovation, and diversity of products available to consumers and institutions.

From a policy perspective, this tension will require ongoing monitoring to ensure that MiCA does not unintentionally create monopolistic conditions in the EU stablecoin market.

Stablecoins and Monetary Sovereignty

The European Central Bank (ECB) has publicly noted that regulated euro-denominated stablecoins could complement the euro’s role in global finance. However, it has also warned that widespread use of foreign-currency stablecoins, especially dollar-pegged tokens, could reduce the effectiveness of domestic monetary policy.

The concern is that if a substantial share of domestic transactions shifts into dollar-denominated stablecoins, the ECB’s ability to influence credit conditions through euro interest rates could diminish. In smaller EU economies, this “digital dollarisation” risk is even more acute, potentially undermining financial stability in the event of volatility in foreign exchange markets.

MiCA addresses this indirectly by imposing stricter oversight on significant stablecoins, including transaction caps for non-euro-denominated tokens if they are deemed to threaten monetary policy or payment systems. The ECB, EBA, and European Commission will need to balance these macroeconomic considerations with the need to keep the EU market open and competitive.

Systemic Risk from Reserve Asset Management

Stablecoin reserves are not static, they require active management to maintain liquidity, generate yield, and match redemption obligations. Under MiCA, reserves for EMTs and ARTs must be held in high-quality, liquid assets, but within these parameters, issuers still make strategic choices about duration, asset mix, and custody arrangements.

Large issuers have already become significant holders of short-term sovereign debt, particularly U.S. Treasury bills. In the event of a market shock, forced liquidation of reserves to meet redemption demands could spill over into traditional markets, affecting yields and liquidity conditions. This was a key lesson from the collapse of certain money market funds during the 2008 financial crisis and more recently from episodes of stress in the UK gilt market.

MiCA’s reserve rules are designed to mitigate these risks through diversification and liquidity requirements, but the regulation will only be as effective as the oversight mechanisms and the transparency of issuer reporting.

Interaction with Decentralised Finance (DeFi)

MiCA is primarily designed for centralised issuers and intermediaries, yet a significant portion of stablecoin activity takes place in decentralised finance ecosystems. Permissionless protocols, lending platforms, decentralised exchanges, yield aggregators, routinely accept and use stablecoins as collateral or settlement instruments.

MiCA-compliant stablecoins can integrate into DeFi, but their embedded compliance controls, such as transfer restrictions and KYC requirements, may conflict with the open-access design of many protocols. This could result in a bifurcated DeFi ecosystem in the EU, where regulated DeFi pools using compliant stablecoins operate alongside unregulated pools reliant on offshore or non-compliant tokens.

The long-term question is whether regulated DeFi, built on MiCA-compliant assets, can achieve sufficient liquidity and utility to compete with global permissionless alternatives. This will depend on institutional participation, user experience, and the development of technical standards for on-chain compliance.

Industry Criticisms and Calls for Clarification

Industry stakeholders have voiced concerns about certain provisions in MiCA, particularly those related to scope, definitions, and operational requirements. Some argue that the definitions of ARTs and EMTs could inadvertently capture tokens not intended to function as payment instruments, creating unnecessary compliance burdens. Others have sought clarity on how MiCA interacts with existing financial services licences, such as whether a credit institution issuing an EMT must also meet separate MiCA obligations beyond its banking licence.

Questions have also been raised about the transition periods. While up to 18 months are allowed for existing issuers to achieve compliance, the deadlines for certain reporting and disclosure requirements have created uncertainty. This is particularly challenging for firms operating in multiple jurisdictions, as they must coordinate compliance strategies with differing local supervisory practices.

Global Comparisons

MiCA is the most comprehensive stablecoin framework currently in force, but it is not the only regulatory initiative in this space. In the United States, legislative proposals such as the “Genius Act” aim to regulate payment stablecoins through federal licensing and reserve standards, but as of early 2025, no federal law has been enacted. This leaves a patchwork of state-level rules and informal regulatory guidance from agencies like the Office of the Comptroller of the Currency (OCC) and the New York Department of Financial Services (NYDFS).

In Asia, Hong Kong’s Monetary Authority (HKMA) has introduced a licensing regime for stablecoin issuers, with a focus on governance, reserve quality, and AML/CFT compliance. Singapore’s Payment Services Act also brings stablecoin issuance under regulatory oversight, with specific requirements for single-currency pegged tokens.

Compared to these approaches, MiCA’s framework is broader, covering not only stablecoins but also other categories of crypto-assets and establishing a harmonised EU-wide passporting system. Its influence is already visible in policy discussions in jurisdictions such as the United Kingdom, Canada, and Australia, where regulators are assessing whether to adopt similar comprehensive models.

The Road Ahead: Adaptation and Evolution

MiCA is a first-generation framework. As with any new regulatory regime, it will require refinement in response to market developments, technological innovation, and supervisory experience. Areas likely to see further evolution include the treatment of algorithmic stablecoins, integration of decentralised governance models, and adjustments to reserve asset rules in response to macroeconomic shifts.

The European Commission has built review clauses into MiCA, mandating periodic assessments of its effectiveness. These reviews will consider whether the scope of regulation should be expanded, whether thresholds for “significant” tokens should be adjusted, and how global developments should inform EU policy.