A new working paper from the European Central Bank (ECB) warns that the growing adoption of stablecoins could reduce bank deposits and weaken the effectiveness of monetary policy across Europe.

According to the ECB, increasing use of stablecoins — digital assets typically pegged to traditional currencies like the US dollar or euro — may cause individuals and businesses to move money out of traditional bank accounts. This shift could reduce the funds banks rely on to support lending activities.

The report, titled “Stablecoins and Monetary Policy Transmission,” highlights that higher stablecoin adoption is already showing measurable effects on the banking system.

ECB researchers stated that rising interest in stablecoins is associated with a decline in retail bank deposits and a reduction in lending to companies. Since banks depend heavily on customer deposits as a stable and low-cost funding source, any decline in deposits could limit their ability to provide credit to the real economy.

Stablecoin Adoption Could Change Bank Funding Dynamics

The ECB explained that when deposits move from banks to stablecoins, financial institutions may be forced to rely more on wholesale or market-based funding. These funding sources are generally more expensive and less stable than traditional deposits.

This shift could ultimately affect how effectively monetary policy decisions — such as interest rate changes — influence lending and financial conditions.

The central bank also noted that the impact of stablecoins is nonlinear, meaning the effects depend on several factors, including the scale of adoption, their design, and the regulatory framework governing them.

Stablecoin Market Growth Raises Concerns

The stablecoin market has expanded rapidly in recent years. Its total market capitalization has more than doubled over the past three years, reaching around $312 billion. Some projections suggest the market could grow to $2 trillion by 2028.

Because of this rapid growth, regulators like the ECB are closely monitoring the sector and its potential impact on the financial system.

Foreign-Currency Stablecoins Pose Additional Risks

The ECB also raised concerns about the dominance of foreign-currency stablecoins, particularly those pegged to the US dollar.

If non-euro stablecoins continue to dominate the market, they could weaken the link between Europe’s domestic monetary policy and the banking sector. This situation may also raise questions about monetary sovereignty and the euro’s role in global payments.

Currently, US dollar-backed stablecoins dominate the market. Data from CoinGecko shows that dollar-pegged tokens account for about $301 billion, representing roughly 97% of the total stablecoin market capitalization.

ECB Continues Monitoring the Stablecoin Sector

The ECB emphasized that understanding the risks associated with stablecoins is becoming increasingly important as digital assets gain wider adoption. The research is part of the central bank’s broader efforts to study how stablecoins might influence financial stability, bank lending, and monetary policy in the euro area.

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Disclaimer

This content is for informational purposes only and not financial advice. Crypto markets are risky, so always do your own research and invest only what you can afford to lose.