Stablecoins are once again under scrutiny from the European Central Bank (ECB), which warned that surging demand and concentrated ownership make the assets vulnerable to runs and de-pegging events. The ECB’s report notes that confidence is crucial for these tokens, and any loss could trigger a mass redemption crisis.
A run on these stablecoins could trigger a fire sale of their reserve assets, which could affect the functioning of US Treasury markets.
European Central Bank Tether’s USDT and Circle’s USDC are particularly significant, together holding the vast majority of stablecoin supply and sizeable amounts of short-term US Treasury bills. A sudden rush to redeem could force these companies to liquidate assets, potentially affecting the US Treasury market’s stability. USDT alone has a market cap of US$184 billion (AU$284 billion) and is the most traded crypto globally.
Within the eurozone, however, the ECB considers risks to financial stability limited, as stablecoins are predominantly dollar-backed and largely confined to crypto trading. Retail adoption remains minor, with cross-border payments and small transactions accounting for only a tiny fraction of overall activity.
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Still, the ECB stresses that continued market growth and differences in international regulation, such as the US GENIUS Act, could change the risk profile and facilitate regulatory arbitrage. New rules in the EU, including MiCA, aim to safeguard investors by restricting interest payments and other banking-like incentives from stablecoin issuers.
In response to the sector’s expansion and the dollar’s dominance, the ECB is developing its own digital euro, aiming for pilot testing by 2027 and a potential launch by 2029. This move is intended to reinforce monetary sovereignty and provide a regulated alternative to private stablecoins.
Related: EU Eyes Centralised Oversight of Stock and Crypto Exchanges to Rival US Markets
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