The European Central Bank is once again raising concerns about the risks of stablecoins in a new report.
The ECB has published a report expressing concern over the rapid expansion of the stablecoin market. Having previously described them as “confusing” and “vulnerable,” the Frankfurt-based institution highlights once more the potential dangers associated with these digital assets.
According to the ECB document, growing investor interest and recent global regulatory developments have pushed stablecoin capitalization to new records. This boom, the European monetary authority warns, could pose a potential threat to the stability of the financial system.
The main weakness identified by the ECB concerns investor confidence. “Stablecoins’ primary vulnerability is that investors lose confidence that they can be redeemed at par,” the ECB’s report read. “This loss of faith can simultaneously trigger a run on a stablecoin and cause a de-pegging event.”
The link with U.S. Treasury securities
A key point involves the two largest stablecoins by capitalization: Tether’s USDT and Circle’s USDC. These tokens are among the main holders of U.S. Treasury securities and have recently acquired massive amounts of short-term Treasuries. The ECB highlights that a redemption rush for these stablecoins could force sales of their reserves, with repercussions for the functioning of U.S. Treasury markets.
Limited risks for the Eurozone
The ECB notes that the financial stability risks from stablecoins are limited within the euro area, since most of these tokens are pegged to U.S. assets. “Moreover, U.S. dollar-denominated stablecoins dominate in the stablecoin market, limiting stablecoins’ interconnections with euro area financial markets through their reserve assets,” it noted. Nevertheless, the rapidly growing use of these instruments requires careful and continuous monitoring, the institution emphasizes.
