ECB warns dollar-pegged stablecoin proliferation could undermine euro area monetary sovereignty

The European Central Bank (ECB) warned that the widespread proliferation of stablecoins could pose structural risks to the euro area’s banking system and monetary policy.

According to a Bloomberg report on the 3rd (local time), the ECB said in a working paper that rapid growth in stablecoins could shift retail deposits into digital assets, weakening banks’ intermediation function. It added that this could increase uncertainty around the transmission channel through which policy-rate changes pass through to lending.

The report noted that risks would be amplified if stablecoins pegged to foreign currencies such as the U.S. dollar come to dominate the market. It said fluctuations in demand for foreign-currency-denominated stablecoins could transmit direct shocks to liquidity and financial conditions within the euro area.

The ECB said that if foreign-currency-based stablecoins spread, banks’ reliance on foreign-currency wholesale funding would rise and there would be a possibility that offshore monetary conditions could spill into the euro area. This means external factors unrelated to Europe’s monetary-policy stance could affect the financial system.

These concerns have been raised as the global influence of dollar-based stablecoins expands. ECB Executive Board member Piero Cipollone said in January that “dollar-pegged stablecoins could threaten financial stability.”

Dutch central bank governor Klaas Knot also said in a speech that day that stablecoins could be a greater source of concern for policymakers than general cryptoassets. He warned that “the structure of reserve-asset management and links to the cryptoasset ecosystem could create risks at the core of the financial system.”

By contrast, Bundesbank President Joachim Nagel mentioned the potential use of euro-pegged stablecoins for payments. European financial institutions including Citigroup, ING Group, UniCredit and DekaBank are also participating in the development of a regulated euro stablecoin.

The ECB stressed in particular that related risks could be “amplified” if the share of foreign-currency-denominated stablecoins increases.