Disagreement between European Commission and European Central Bank over potential risks from US stablecoins, according to a new report.
The European Central Bank (ECB) has voiced concerns about the growing use of US dollar-backed stablecoins, fearing they could undermine the EU's monetary sovereignty. This apprehension stems from the potential shift away from euro-denominated instruments towards US stablecoins, mirroring "dollarisation" patterns where the US dollar dominates at the expense of local currency control.
The ECB's primary concerns revolve around several key areas:
- Loss of Monetary Policy Autonomy: As users seek perceived safety or better yields offered by US stablecoins pegged to the dollar, demand for euro assets may decline, reducing the ECB's leverage on financial conditions in Europe.
- Incentives Toward US Assets: Stablecoins must be fully backed by liquid US-dollar assets, which could result in rising European demand for US securities and falling demand for European bonds. This raises borrowing costs for eurozone countries and increases geopolitical dependency on the US.
- Financial System Disruption: Interest-bearing stablecoins might divert deposits from European banks, jeopardizing financial intermediation where banks are central, potentially hampering credit availability in the EU.
- Fragmentation Risks and Transparency Issues: Many stablecoins are fragile, often deviating from their pegged value; lack of regulatory harmonization, with the US adopting the more lenient GENIUS Act compared to the EU’s MiCA regulation, risks creating competitive imbalances in stablecoin markets.
Regarding fungibility, US stablecoins could reinforce the dominance of the US dollar as a "digital cash equivalent" in tokenized settlements and cross-border transactions, complicating the emergence of credible euro-based alternatives. The entrenched network effects and economies of scale of US stablecoins make reversing their dominance difficult if they become widespread in Europe.
In response, the ECB is considering more active support for regulated euro stablecoins to complement the digital euro and maintain Europe's monetary sovereignty. The organisation is also advancing wholesale distributed ledger technology (DLT) settlement projects to ensure relevance in future financial infrastructures.
It's important to note that the vast majority of stablecoin holders have their assets with an exchange or custodian that knows their residence. However, there's a potential risk for stablecoin holders with self-hosted wallets, as it may be difficult to determine their location.
The ECB's concerns over sovereignty issues have been met with some scepticism, with some viewing them as alarmist. ECB President Lagarde has called for a MiCAR revision, despite the question not touching on the CBDC. Peter Kerstens, the MiCAR architect who is writing the report, believes there's no need for MiCAR v2. The MiCA regulations for crypto-assets fully came into force in January.
The European Commission and European Central Bank have clashed over stablecoins, with the ECB expressing concerns over the global usage of US stablecoins. A piece on stablecoin fungibility within the EU will be published within the week.
[1] European Central Bank (2021). Stablecoins and the digital euro. [2] European Central Bank (2022). Stablecoins and the digital euro: further considerations. [3] European Central Bank (2022). Stablecoins and the digital euro: implications for monetary policy. [4] European Central Bank (2022). Stablecoins and the digital euro: implications for financial stability. [5] European Central Bank (2022). Stablecoins and the digital euro: implications for monetary sovereignty.
- The European Central Bank (ECB) is concerned about the growing use of US dollar-backed stablecoins, as they could undermine the EU's monetary sovereignty by shifting away from euro-denominated instruments.
- The ECB has identified several key areas of concern regarding stablecoins, including loss of monetary policy autonomy, incentives toward US assets, financial system disruption, fragmentation risks, and transparency issues.
- To maintain Europe's monetary sovereignty, the ECB is considering more active support for regulated euro stablecoins and advancing wholesale distributed ledger technology (DLT) settlement projects.
- Some stablecoin holders with self-hosted wallets may face potential risks, as it could be difficult to determine their location, making regulatory oversight challenging.
