ECB rejects stablecoins as a path to wider euro influence

ECB President Christine Lagarde once again expressed skepticism about stablecoins in a recent speech. Even euro-denominated stablecoins may pose risks for bank institutions and financial stability, she stated

Christine Lagarde noted stablecoins were one of the few innovations in crypto space which moved from a marginal topic to a central concern for regulators

Lagarde noted stablecoins, with over $300B in total supply, still heavily depend on two main issuers, Tether, and Circle. Over 90% of stablecoins are denominated in US dollars, revealing the limited role of the euro in crypto space

“As their adoption has expanded and their links to the real financial system are deepening, the risks they pose have come firmly into focus, especially as regards financial stability. These concerns have been particularly acute in parts of Latin America and Africa, but they are now firmly part of the policy debate in advanced economies as well,” said Lagarde in a speech at the Banco de España LatAm Economic Forum.

Lagarde warned that even euro-denominated stablecoins present a risk to financial stability and the effects of monetary policy. While those stablecoins can increase the influence of the euro, Lagarde warned there could be costs to adding stablecoins to the financial system.

The ECB is still considering the launch of a native digital euro, as Cryptopolitan reported earlier.

Why is the ECB skeptical of stablecoins?

ECB has studied stablecoins over the years, constantly re-estimating their impact on the economic system.

Lagarde explained Europe was relatively early in the stablecoin debate, and launched its MiCAR framework ahead of the USA Genius Act. The MiCAR launch in 2024 aimed at containing the risks for the financial system, by tracking and sometimes limiting liquidity flows.

The ECB will not compete with the US approach, where stablecoins are seen as another tool to increase the dominance and adoption of the US dollar. Stablecoins were also a pathway to the adoption of US treasuries, as Tether and other issuers were major buyers of US debt.

Lagarde rejected the argument that Europe has to remain relevant by promoting euro-denominated stablecoins. However, the ECB President warned that even asset-backed stablecoins held remuneration risks.

Since issuers under MiCAR must hold backing for each token in bank reserves, stablecoins can be exposed to individual banking risks. As Lagarde pointed out, even USDC was affected when Circle disclosed $3.3B held in the distressed Silicon Valley Bank.

While euro-denominated stablecoins can boost access from global markets, Lagarde warned of potential financial instability.

“Where the same stablecoin is issued jointly by EU and non-EU entities, MiCAR’s safeguards reach only the EU issuer. In a run, investors will naturally seek to redeem where protections are strongest – which is likely to be the EU, where MiCAR also prohibits redemption fees,” explained Lagarde.

Reserves in Euro Area banks may be insufficient, putting undue pressure on those banks to honor stablecoin redemptions

Stablecoins may also undermine Euro Area bank lending, thus making it difficult for the ECB to perform its stabilization role. For the US market, easier access to capital markets may offset the lost bank lending, allowing the economy to carry a larger supply of stablecoins, added Lagarde

Euro-denominated stablecoins grow organically

EURC by Circle is the leading euro-denominated stablecoins. It has a supply of over $543M, still low compared to other legacy stablecoins

In the past year, euro-based stablecoins have increased their supply by 48%, though still remaining a niche asset. Spain is among the countries with the widest adoption of Circle’s EURC, based on Banco Santander’s exploration into stablecoins.

Euro-based stablecoins have grown organically, even without special promotion by the ECB or other regulators. | Source: Dune Analytics.

Most of the euro-based stablecoins have fiat backing, with only three assets depending on a crypto collateral, based on Dune Analytics data. EURC is the dominant token, with the most significant representation in DEX trading.

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