Regulating Stablecoins as Private Money between Liquidity and Safety. The Case of the EU 'Market in Crypto Asset' (MiCA) Regulation

50 Pages Posted: 16 Sep 2022 Last revised: 28 Apr 2023

See all articles by Edoardo D. Martino

Edoardo D. Martino

University of Amsterdam - University of Amsterdam Faculty of Law; European Banking Institute

Date Written: August 30, 2022

Abstract

Stablecoins are crypto assets that purport to maintain a stable value by referencing other physical or financial assets. Stablecoins are attracting considerable attention as a new way of creating private money.
This article analyses the financial stability concerns surrounding stablecoins, specifically looking at liquidity risk and demonstrates that the applicable legal framework shapes such concerns.
This finding is based on two main arguments. First, there is a trade-off between the different regulatory goals, namely promoting innovation, protecting investors, and safeguarding financial stability. This posits that the policymaker cannot achieve these three goals simultaneously but can only prioritize two. Second, the article shows that the liquidity risk inherent in stablecoins can be bolstered by a regulatory framework promoting financial innovation and investor protection, especially when it comes to the requirements on the reserve assets and the withdrawal rights of token holders.
This framework is applied to the European ‘Market in Crypto Asset’ (MiCA) Regulation. The analysis highlights that MiCA focuses on investor protection and promoting innovation, whereas financial stability remains in the background. This generates incentives increasing the risk of a run on stablecoin should liquidity dry up, making stablecoins a source of vulnerability for financial stability in the coming years.

Keywords: Stablecoin, Money Market Funds, Liquidity, Run,Financial Stability, MiCA

JEL Classification: G23; G28; K23

Suggested Citation

Martino, Edoardo D., Regulating Stablecoins as Private Money between Liquidity and Safety. The Case of the EU 'Market in Crypto Asset' (MiCA) Regulation (August 30, 2022). Amsterdam Law School Research Paper No. 2022-27, Amsterdam Center for Law & Economics Working Paper No. 2022-07, Available at SSRN: https://ssrn.com/abstract=4203885 or http://dx.doi.org/10.2139/ssrn.4203885

Edoardo D. Martino (Contact Author)

University of Amsterdam - University of Amsterdam Faculty of Law ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

European Banking Institute ( email )

Frankfurt
Germany

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