The European Central Bank warns that stablecoins can affect financial stability and the international role of the euro.

The European Central Bank warns that stablecoins, while they can make payments and settlements faster, can create risks for banks, monetary policy, and the position of the euro in an increasingly digitalized financial system. Isabel Schnabel, a member of the ECB's Executive Board, argues that central banks need to develop public digital infrastructures, including a digital euro and tokenized central bank money for financial markets.

The European Central Bank warns that stablecoins can pose risks to financial stability, can alter the transmission of monetary policy, and can strengthen the international dominance of the dollar if adopted widely without rules and public infrastructures adapted to the new technology.

Isabel Schnabel, a member of the ECB's Executive Board, has stated that central banks should not reject financial innovation, but must ensure that new forms of private money complement, not replace, public money. In the ECB's view, the European response goes through a digital euro, tokenized central bank money for financial markets, and rules to limit the risks generated by stablecoins.

In short

The ECB warns that stablecoins can create a new form of banking disintermediation if households and companies move money from bank deposits to private tokens.

The global market for stablecoins is approaching 300 billion dollars, with Tether and USD Coin representing about 90% of the total.

Stablecoins denominated in euros remain marginal, with a total capitalization of about 500 million euros.

The ECB believes that stablecoins can create risks of massive withdrawals, forced asset sales, and contamination between the crypto sector and the banking system.

The ECB sees the digital euro and tokenized central bank money as tools to maintain the role of public money in the digital economy.

Stablecoins are privately issued digital tokens, usually pegged to official currencies and backed by portfolios of traditional assets. They promise near-instant settlement, programmability, global access, and lower costs for cross-border payments, but their use remains dominated by crypto markets. According to the ECB, about 85% of the transaction volume on crypto platforms involves exchanges between stablecoins and other crypto assets.

Schnabel compares stablecoins to money market funds, which have grown significantly in the United States since the 1970s and have provided investors with better returns and alternatives to bank deposits. Money market funds have helped develop market financing but have also made the financial system more dependent on short-term funding, more volatile, and more sensitive to rapid withdrawals.

The ECB's primary concern is financial stability. If households and companies replace bank deposits with stablecoins, banks could become more reliant on wholesale funding, which is more concentrated and unstable. At the same time, stablecoins can be vulnerable to loss of confidence in the assets that back them, just as money market funds were vulnerable during the global financial crisis when massive withdrawals froze segments of the short-term funding markets.

The risk depends on the assets held in the reserves of the issuers. The ECB shows that Tether holds parts of its reserves in relatively illiquid or risky assets, including commodities, loans, and crypto assets, while USD Coin is primarily backed by sovereign bonds and repo operations. In the case of massive redemptions, forced asset sales could affect sovereign debt markets and other segments of fixed-income markets.

European rules are different. In the European Union, the Regulation on crypto-assets requires that at least 30% of stablecoin reserves be held in the form of bank deposits, with the percentage rising to 60% for significant stablecoins. The ECB believes that this rule can increase the liquidity of reserves and limit disintermediation, but it can also create new channels of contamination between stablecoin issuers and banks.

The second concern relates to monetary policy. Stablecoins can change the way interest rates set by the central bank reach the economy. If banks lose stable deposits and rely more on market funding, their costs may adjust more quickly to monetary policy decisions. This can strengthen the transmission of interest rates but can also increase uncertainty regarding the effects on lending.

Schnabel notes that stablecoins without interest behave differently from money market funds. When interest rates rise, stablecoin holders may prefer assets that offer yield, including bank deposits. The net effect depends on how stablecoins are used: as a means of payment or as a store of value.

The third concern relates to the international role of currencies. The ECB warns that almost all stablecoins in circulation are denominated in dollars, while other currencies play a negligible role. If dollar-denominated stablecoins become global payment and settlement infrastructures, they can strengthen the transmission of U.S. monetary policy outside the United States and limit the role of the euro in tokenized financing.

The ECB's response is the development of public payment and settlement infrastructure. Schnabel stated that the Eurosystem is working in two directions: a digital euro, as a central bank digital currency for the population, and tokenized central bank money for wholesale transactions. In the retail space, the digital euro would maintain citizens' access to public money, reduce dependence on non-European payment providers, and diminish the fragmentation of the European payment market.

For financial markets, the ECB is working on the Pontes and Appia projects. Pontes aims for the settlement of transactions based on distributed ledger technology in central bank money, through a bridge with TARGET services. Appia aims for a broader architecture for a tokenized European financial ecosystem, including tokenized central bank money, monetary policy, collateral, and the interoperability of traditional tokenized assets.

The ECB's message is that stablecoins should not be treated merely as crypto products. If they reach systemic scale, they can influence bank funding, government bond yields, monetary policy, cross-border payments, and competition between currencies. For Europe, the stakes are to maintain the role of the euro in a financial system where money, assets, and payment infrastructures are becoming increasingly digital.

https://2eu.brussels/ro/stiri/banca-centrala-europeana-avertizeaza-ca-stablecoin-urile-pot-afecta-stabilitatea-financiara-si-rolul-international-al-euro