ECB Bank: Stablecoins could undermine bank lending activities and monetary policy in Europe

European Central Bank (ECB) warns that increasing use of stablecoins could lead to capital outflows from bank deposits and weaken the effectiveness of monetary policy on lending activities.

According to a report in the series titled “Stablecoins and Monetary Policy Transmission” published on Tuesday, the growing adoption of stablecoins—digital assets often pegged to currencies like the US dollar or euro—may attract funds away from traditional bank deposits.

“Our analysis shows that rising interest in stablecoins is closely linked to a significant decline in retail bank deposits, along with a reduction in lending to businesses,” ECB experts emphasized. The report also indicates that the development of stablecoins could reduce banks’ ability to provide credit to the real economy.

ECB notes that the impact of stablecoins is not linear but depends on the scale of adoption, design features, and the regulatory framework.

This report is part of ECB’s ongoing monitoring efforts of stablecoins—digital assets whose market capitalization has more than doubled over the past three years, from the current $312 billion and expected to reach $2 trillion by 2028.

Impact of Stablecoins: Banks, Monetary Policy, and the Role of Currency

To assess the impact of stablecoin development on the banking system, ECB highlights the phenomenon of “substitution effect of deposits.” Households and businesses tend to shift funds from traditional bank deposits to digital assets.

“Banks rely heavily on deposits as a stable and low-cost funding source to support lending activities for households and businesses,” the report states. “When deposits decline, banks may need to rely more on market funding or other sources, which are often more expensive and less stable.”

Actual and projected developments in the stablecoin market | Source: ECB (Citigroup, Coinbase, JPMorgan) Additionally, the report points out that stablecoins could alter how monetary policy interest rates influence the cost of capital and bank lending activities. The impact will vary depending on the scale of adoption, stablecoin design, and related regulations.

“We observe that stablecoin adoption could disrupt several key monetary policy transmission channels, thereby weakening the predictability of policy actions,” the report’s authors conclude.

Currency Ratios and Concerns for the Euro Area

The report also expresses concerns about the rise of stablecoins valued in foreign currencies, especially the US dollar. This could weaken the link between domestic monetary policy and bank lending activities, with risks increasing if the market is dominated by stablecoins not pegged to the euro.

ECB officials have previously warned that the popularity of dollar-pegged stablecoins could pose challenges to the euro area's monetary sovereignty and diminish the euro’s role in cross-border payments.

The research report cites data showing that dollar-backed stablecoins dominate the global stablecoin market. According to CoinGecko, tokens pegged to the dollar currently total $301 billion, accounting for 97% of the total stablecoin market capitalization at the time of publication.