Stablecoins are on the rise globally, but the European Central Bank (ECB) is less enthusiastic about this development and is sounding the alarm. According to the central bank, these digital currencies are siphoning capital away from banks in the eurozone, thereby increasing the vulnerability of the financial system.
The ECB warns that a mass outflow—a digital bank run on popular stablecoins—could even escalate into global financial chaos. This is all outlined in a recently published report.
A $300 Billion Market #
The market capitalization of stablecoins has now grown to over $300 billion. With the advent of the United States’ GENIUS Act, this market has exploded. Stablecoins already represent approximately 10% of the total cryptocurrency market capitalization.
The largest stablecoin issuers, Tether (USDT) and Circle (USDC), are among the biggest holders of U.S. Treasury certificates. These are short-term loans issued by the U.S. government to borrow money. Together, they account for a market capitalization of $250 billion, dominating the stablecoin market.
What is the ECB Afraid Of? #
In an extensive report, the ECB warns that stablecoins pose a global financial stability risk because they draw valuable funds from small investors or customers away from eurozone banks.
If stablecoins continue to grow, it could lead to an outflow of these funds, causing a crucial funding source for these banks to dry up. Furthermore, the ECB states, this creates volatile financing.
Another problem, according to the central bank, is the possibility of a run on popular stablecoins. This would force Circle and Tether to sell their reserve assets, potentially increasing their influence on the U.S. bond market and, in the most extreme case, causing a global financial crisis.
A Different Perspective on Stablecoins #
Faryar Shirzad, Chief Policy Officer at crypto exchange Coinbase, wrote in October that the full backing of their reserves makes stablecoins very safe. Traditional banks operate with fractional reserves, meaning they only hold a small fraction of deposited funds in cash. The U.S. GENIUS Act, by contrast, requires stablecoin issuers to back their coins 100%.
According to Shirzad, stablecoins are therefore a factor that strengthens financial stability.