Stablecoins could pose major risks to monetary policy, ECB paper warns
European lenders are developing a regulated euro-based instrument
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WIDESPREAD adoption of stablecoins would pose major risks to euro-area banks and the European Central Bank’s (ECB) monetary sovereignty, particularly if linked to foreign currencies like the US dollar, an ECB working paper warned.
Rapid expansion could trigger a reallocation from retail bank deposits to digital assets and constrain lenders’ intermediation capacity, thereby also increasing uncertainty in the pass-through of policy rates to lending volumes, said the paper, which was published on Tuesday (Mar 3).
The effects would be even more significant if a developed stablecoin market were dominated by non-euro-denominated instruments, authors Carlo Altavilla, Miguel Boucinha, Lorenzo Burlon, Ramon Adalid, Roberta Fortes and Franziska Maruhn wrote.
US President Donald Trump’s push to make crypto more mainstream has raised fears that US dollar-backed stablecoins could gain a foothold in Europe. Executive Board member Piero Cipollone said in January that such instruments could “threaten financial stability”.
Speaking later Tuesday, Dutch central-bank chief Olaf Sleijpen said that stablecoins in general may represent a bigger concern to policymakers than cryptocurrencies.
“Because of how their reserves are managed, they can pose risks to the core of the financial system, especially given their close links to the broader crypto ecosystem,” he said in a speech in Groningen. “In the US, regulation is still largely lacking – and that worries us, given the global and US dollar-based nature of many stablecoins.”
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Bundesbank President Joachim Nagel last month touted euro-pegged stablecoins for payments. European lenders, including Citigroup, ING Groep, UniCredit and DekaBank, are developing a regulated euro-based instrument.
While analysing the general dangers from stablecoins, the ECB paper argues that risks would be significantly “amplified” by a growing prevalence of foreign-currency-denominated instruments.
“Their diffusion is likely to increase banks’ reliance on foreign-currency wholesale funding,” it said, adding that this could import monetary conditions from outside the region.
“Fluctuations in the demand for foreign-currency-pegged stablecoins could transmit foreign monetary and financial shocks directly into the euro area, effectively importing external liquidity conditions that are potentially orthogonal to the domestic policy stance,” it said. BLOOMBERG
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