Regulation supports the growth of stablecoins, but is it sufficient?

In the rapidly evolving digital finance landscape, stablecoins are gaining traction as a means of transferring value in a manner similar to traditional bearer instruments. These digital currencies, denominated in national currencies and operating on blockchain, are increasingly being used for cross-border payments.

Compliance

Regulatory approaches to stablecoins vary significantly between the EU and US. The Genius Act of 2025 in the US establishes a stringent legal framework requiring stablecoins to be fully backed by liquid US-dollar assets like short-term Treasuries, creating strong regulatory certainty but placing heavy compliance burdens on issuers. In contrast, the EU’s MiCA regulation imposes tight reserve requirements, transparency, and licensing obligations on significant stablecoins, leading to delisting of non-compliant stablecoins like USDT from European exchanges.

Competition

The US framework encourages stablecoins predominantly backed by US dollar assets, reinforcing demand for US Treasuries and dollar-based stablecoins. This regulatory clarity enhances the US stablecoin market but also pressures Europe to respond. MiCA’s licensing and reserve rules favor euro-backed and compliant stablecoins, but so far, their market share remains small. The delisting of major US-backed stablecoins in Europe reduces US stablecoins’ dominance there, potentially encouraging development of EU-based alternatives.

Money Fragmentation and Monetary Sovereignty

US stablecoin regulation, by linking stablecoins to US Treasuries, incentivizes holding US assets globally, raising concerns about weakening European monetary sovereignty and the euro’s international role. The shift toward dollar-backed stablecoins can cause systemic risks such as liquidity constraints in European banks and impair monetary policy transmission in the EU. MiCA seeks to contain these risks but introduces systemic risks to the European banking system should a large stablecoin issuer face difficulties.

Ousmène Mandeng, Senior Adviser at Accenture and Visiting Fellow at the London School of Economics and Political Science, suggests a better approach for countries still considering stablecoin regulation would be to map stablecoins into existing regulation or ask stablecoin issuers to elect an existing regulatory model.

The easy transferability of stablecoins creates new challenges for compliance, as it can facilitate money laundering, terrorism financing, and the violation of sanctions. The longer the payment chain, the more burdensome the compliance checks become. However, the use of permissionless blockchains offers economies of scale as a public financial market infrastructure. A clearing arrangement like the one maintained by banks (nostro accounts) could facilitate easier stablecoin transfers.

In summary, US regulation emphasizes integrating stablecoins into the dollar-centered financial system, pushing for expansion of US monetary influence, while the EU focuses on regulatory containment to protect its financial stability and monetary sovereignty. This divergence affects compliance costs, leads to competitive shifts favoring compliant domestic stablecoins, and risks fragmenting global stablecoin usage and monetary control between the two regions.

The evolution of digital finance incorporates digitalisation, with stablecoins becoming popular for cross-border payments, raising concerns about economic sovereignty, particularly in Europe.
Regulatory frameworks like the Genius Act in the US demand rigorous compliance, creating regulatory certainty but imposing heavy burdens on stablecoin issuers.
In contrast, the EU's MiCA regulation mandates tight reserves, transparency, and licensing for significant stablecoins, causing delisting of certain stablecoins and incentivizing the growth of euro-backed alternatives.
Furthermore, the use of AI in identification systems can aid in reducing risks associated with digital finance, such as money laundering and terrorism financing.
In light of these complexities, emerging best practices in stablecoin regulation could involve mapping stablecoins into existing regulation or allowing stablecoin issuers to choose an existing regulatory model.
Lastly, technology plays a crucial role in the digitalisation of finance, as advancements in AI and data analytics provide valuable insights into financial markets, facilitating more informed decision-making in business and public finance.