• The ECB warns stablecoins could lead to retail deposit outflows, weakening eurozone banks’ stability.
• A run on stablecoins could trigger a sell-off of reserves.
• Major stablecoin issuers, Tether and Circle, hold substantial U.S. Treasury bills.

The European Central Bank (ECB) has raised concerns over the growing influence of stablecoins in the global financial system. According to a recent report, the ECB warned that stablecoins could present significant risks to financial stability, particularly by pulling retail deposits away from traditional eurozone banks. With stablecoins now accounting for around 8% of the total cryptocurrency market, the ECB’s caution highlights their potential to destabilize the broader financial environment.

Stablecoins and Bank Deposits

Stablecoins, which are digital currencies that are tied to traditional currencies such as the U.S. dollar, have gained a lot of popularity. Their total market capitalization has already surpassed $280 billion. However, the ECB is worried that the unceasing increase of these assets might cause massive withdrawals of retail deposits from banks in the eurozone. 

These deposits represent a major funding source for banks, and a movement to stablecoins could make these lenders more vulnerable to changing and unreliable funding sources. In its report, the ECB explained that a large-scale movement of retail deposits into stablecoins would weaken banks’ stability. Stablecoins offer consumers an alternative to traditional bank accounts, which could draw money away from these institutions and diminish their financial resilience.

Risks of a Stablecoin Crisis

One of the most significant concerns raised by the ECB is the potential for a “run” on stablecoins. Should investors lose confidence in these digital assets, it could trigger a sudden sell-off of the reserve assets backing them. This could lead to a fire sale of assets like U.S. Treasury bills, which are held in large quantities by major stablecoin issuers such as Tether and Circle Internet.

A situation like this could impact the Treasury markets in the United States and thereby create a situation of financial instability wider in scope. The European Central Bank has provisioned that the worst scenario of stablecoins going collapse could lead to a crisis of the financial system due to the extensive interconnection of stablecoins with the financial system and their major role as risk mitigators.

The fast growth of stablecoins has made them a subject of concern for regulators worldwide. The most important stablecoin attractors, Tether (USDT) and Circle Internet (USDC), both have the amount of U.S. Treasury bills as a major dimension of their reserves. On the other hand, a few token issuers, such as Coinbase Chief Policy Officer Faryar Shirzad, think that with their providing higher safety than traditional banking systems and the ECB’s cautious stance, the central bank is still evaluating the impact of long-term usage of stablecoins on the global financial system.