European stablecoins should not become Europe’s answer to the American dominance of the digital dollar, warns the European Central Bank (ECB). ECB President Christine Lagarde believes that Europe should not copy the American stablecoin model, but develop its own financial infrastructure based on central bank money.
Speaking at the Banco de España LatAm Economic Forum in Spain, Lagarde said that stablecoins are no longer a niche topic in the crypto market, but an issue of global monetary policy.
The stablecoin market has been growing strongly in recent years. According to the data presented by Lagarde, their market value increased in just six years from less than 10 billion dollars to more than 300 billion dollars. Almost the entire market is denominated in US dollars, while about 90 percent is controlled by Tether and Circle.
According to her, it was the dominance of dollar stablecoins that changed the nature of the global debate. In the US, stablecoins are no longer seen as just a matter of innovation or consumer protection, but as a tool to preserve the international dominance of the dollar and the demand for US government bonds, reports Bankar me.
Lagarde states that the US administration openly presents the GENIUS Act as an instrument to strengthen the global position of the dollar and US government bonds. This is why, as he says, the debate is no longer about whether stablecoins should exist, but whether countries can afford not to have them.
However, the ECB believes that Europe should not follow the American model. Lagarde warns that the real question is not whether the eurozone should have euro-stablecoins just because the US is developing digital versions of the dollar, but what Europe wants to achieve with stablecoins.
It distinguishes two key functions of stablecoins – monetary and technological. The monetary function refers to the transfer of value outside the traditional banking system. Stablecoins enable faster transactions and easier access to stable currencies in countries with unstable domestic currencies or limited access to the dollar, which is particularly visible in Latin America, Africa and the Middle East.
However, the ECB warns that the benefits of the euro-stablecoin are not great enough to justify the potential risks. According to ECB estimates, European stablecoins could weaken the banking system and reduce the effectiveness of monetary policy implementation.
Financial stability stands out as the biggest risk. The ECB states that stablecoins are private obligations whose stability depends on trust in the reserves that back them. If that trust weakens, mass buyouts and disruptions in the market are possible.
Lagarde recalled the case from March 2023, when Circle announced that $3.3 billion of USDC reserves were in Silicon Valley Bank. After that, the USDC temporarily lost its connection with the dollar and fell to $0.877.
The ECB warns that similar events in Europe could cause serious disruptions to the financial system.
Another major risk is related to the implementation of monetary policy. If citizens and companies start shifting deposits from traditional banks to stablecoins issued by non-banking institutions, it could weaken the banking channel of funding. This is particularly sensitive for the eurozone, where banks still play a key role in financing the economy.
This is why the ECB fears that the spread of euro-stablecoins could reduce the impact of monetary policy on lending to companies and households.
When it comes to the technological function of stablecoins, the ECB does not want to block innovation. Stablecoins today play an important role as digital money for settling transactions in tokenized financial markets.
Distributed ledger technology enables the issuance, trading and settlement of financial instruments on unique platforms, thereby speeding up processes and reducing market fragmentation.
However, the ECB believes that such infrastructure must be linked to central bank money, not private stablecoins.
According to Lagarde, private stablecoins have two main problems – fragility and fragmentation. Fragility arises from the possibility of losing the connection to the currency during market shocks, while fragmentation arises from the existence of multiple private instruments without a common monetary support.
The Eurosystem is therefore developing its own infrastructure for the digital settlement of transactions. The Pontes project should enable the wholesale settlement of DLT transactions in central bank money by connecting distributed ledger platforms to the TARGET system from September.
The ECB states that the tests during 2024 covered 50 transactions in nine jurisdictions, with a total value of around 1.6 billion euros.
In addition, the Appia project envisages the development of an interoperable European tokenized financial ecosystem by 2028.
The ECB’s message is becoming increasingly clear – Europe wants to take advantage of tokenization and faster digital settlement, but without copying the US stablecoin model based on private issuers.
Christine Lagarde believes that Europe should not replicate instruments developed elsewhere, but rather build an infrastructure that corresponds to the European monetary system and financial stability.
In other words, the ECB is not rejecting digital money, but it is making it clear that stablecoins must not become a private substitute for the European monetary system.
