Stablecoin Regulation Gaps: Assessing Financial Stability and Investment Implications in the EU

The European Union’s Markets in Crypto-Assets (MiCA) regulation, enacted in 2024, has positioned itself as a global benchmark for stablecoin oversight. Yet, beneath its surface, critical gaps persist—particularly in cross-border scenarios and regulatory arbitrage opportunities—that threaten financial stability and investor confidence. As stablecoin adoption accelerates, the EU’s regulatory framework faces mounting scrutiny from central banks, financial institutions, and policymakers. This analysis unpacks the systemic risks and investment implications of these gaps, drawing on recent developments and expert assessments.

Systemic Risks: The Fragility of Cross-Border Stablecoin Schemes

MiCA mandates that stablecoin issuers maintain full reserve backing, enforce transparency through white papers, and allow redemptions at par value [1]. However, these rules apply only to EU-based entities. When stablecoins are jointly issued by EU and non-EU firms—such as a euro-backed token co-issued by a German bank and a U.S. fintech—the EU’s safeguards become asymmetric. For instance, if a run occurs, investors will naturally redeem in the jurisdiction with the strongest protections (the EU), but the EU’s reserves may be insufficient to meet concentrated demand [2]. This mirrors the 2008 banking crisis, where liquidity mismatches in cross-border groups triggered cascading failures.

The European Central Bank (ECB) has warned that such scenarios could force the EU to honor redemptions without access to foreign-held reserves, effectively guaranteeing the solvency of non-EU entities [3]. This risk is compounded by the dominance of U.S. dollar-backed stablecoins, which now account for 99% of the global market [4]. As these tokens gain traction in euro-area transactions, they threaten to erode the ECB’s monetary sovereignty and amplify exposure to external shocks.

Regulatory Arbitrage: The Global Playing Field

The EU’s stringent requirements contrast sharply with more lenient frameworks elsewhere. The U.S. GENIUS Act, for example, allows stablecoin issuers to avoid quarterly reserve disclosures and redemption caps, creating a de facto regulatory arbitrage [5]. This divergence incentivizes firms to operate in jurisdictions with weaker oversight, as seen with projects like Tether and USD Coin (USDC), which have adapted their operations to exploit these gaps [6].

Such arbitrage not only undermines MiCA’s objectives but also exposes the EU to systemic risks. For instance, non-EU stablecoins operating in the EU may bypass MiCA’s reserve requirements, leading to liquidity mismatches and potential insolvency. The European Systemic Risk Board (ESRB) has highlighted this as a growing vulnerability, noting that interconnectedness between crypto and traditional finance could amplify contagion risks [7].

Investment Implications: Navigating a Fractured Landscape

Financial institutions are increasingly cautious about stablecoin investments. A 2025 report by the Bank for International Settlements (BIS) underscores that stablecoins fail key tests of a viable monetary system: singleness (a single medium of exchange), elasticity (adjustment to demand), and integrity (resilience to shocks) [8]. This raises concerns about their role in large-scale transactions, where a stablecoin collapse could trigger fire sales of safe assets and destabilize payment systems.

Investors must also grapple with jurisdictional risks. For example, the ECB’s Annual Economic Report 2025 warns that euro-denominated stablecoins remain a niche market, with a capitalization of less than €350 million—far below the $230 billion in global stablecoin supply [9]. This imbalance creates dependency on dollar-based tokens, which could amplify exposure to U.S. monetary policy and geopolitical tensions.

Mitigating the Risks: A Path Forward

To address these challenges, the EU must close regulatory gaps through international cooperation. Christine Lagarde, ECB President, has called for equivalence regimes that hold non-EU issuers to the same standards as EU-based entities [10]. This includes ensuring foreign reserves are adequate for redemptions and enforcing transparency in cross-border operations.

Domestically, MiCA’s enforcement must be strengthened. For example, the delisting of non-compliant stablecoins by Q1 2025 has already reduced market fragmentation, but ongoing monitoring is needed to prevent circumvention [11]. Financial institutions, meanwhile, should adopt robust risk management strategies, including liquidity buffers and scenario-based stress testing, to mitigate stablecoin-specific vulnerabilities [12].

Conclusion

The EU’s regulatory leadership in stablecoin oversight is commendable, but its success hinges on addressing cross-border asymmetries and global coordination. As stablecoins evolve from niche tools to systemic players, investors and policymakers must remain vigilant. The stakes are high: a misstep could destabilize not just the EU’s financial system, but the global monetary order.

Source:
[1] MiCA-Compliant Stablecoins: The New Standard for Regulated Digital Money in Europe [https://moderndiplomacy.eu/2025/07/23/mica-compliant-stablecoins-the-new-standard-for-regulated-digital-money-in-europe/]
[2] The stablecoin loophole that could expose the EU [https://www.london.edu/news/regulatory-framework-should-be-established-for-tokens-issued-inside-and-outside-the-eu]
[3] EU stablecoin regulations leave Europe vulnerable, says ECB [https://finance.yahoo.com/news/eu-stablecoin-regulations-leave-europe-133908088.html]
[4] From hype to hazard: what stablecoins mean for Europe [https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20250728~e6cb3cf8b5.en.html]
[5] Regulating Stablecoins: Comparing MiCAR and the GENIUS Act [https://papers.ssrn.com/sol3/Delivery.cfm/5383158.pdf?abstractid=5383158&mirid=1]
[6] Comprehensive Analysis of Stablecoins Across Blockchain Ecosystems [https://medium.com/@gwrx2005/comprehensive-analysis-of-stablecoins-across-blockchain-ecosystems-f7c227c740c2]
[7] EU Non-bank Financial Intermediation Risk Monitor 2025 [https://www.esrb.europa.eu/pub/nbfi/html/esrb.nbfi202509.en.html]
[8] III. The next-generation monetary and financial system [https://www.bis.org/publ/arpdf/ar2025e3.htm]
[9] From hype to hazard: what stablecoins mean for Europe [https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20250728~e6cb3cf8b5.en.html]
[10] ECB President Calls for Stricter Oversight of Non-EU Stablecoin Issuers [https://coincentral.com/ecb-president-calls-for-stricter-oversight-of-non-eu-stablecoin-issuers/]
[11] MiCA Regulation: What Crypto Projects Must Know For 2025 [https://hacken.io/discover/mica-regulation/]
[12] Banking on Stablecoins: A Risk Mitigation Blueprint for Financial Institutions [https://www.trmlabs.com/resources/blog/banking-on-stablecoins-a-risk-mitigation-blueprint-for-financial-institutions]