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- Stablecoins’ rapid growth could force the ECB to reassess its monetary policies.
- Tether (USDT) and USD Coin (USDC) dominate the global stablecoin market.
- ECB pushes for a digital euro to counter the risks posed by private-sector stablecoins.
Stablecoins are becoming a major threat to Europe’s financial stability, possibly prompting the European Central Bank (ECB) to reassess its policies. Dutch central bank governor Olaf Sleijpen raised concerns over the rapid growth of stablecoins in the US, according to the Financial Times, following the GENIUS Act signed by President Trump, which allows private companies to issue dollar-backed digital tokens.
Since the adoption of the GENIUS Act, the pace of stablecoin emissions has visibly increased, and the number of dollar-backed digital coins has grown by more than 48%. This has taken the total value of such tokens to over $300 billion.
The current stablecoin industry is dominated by Tether (USDT) and USD Coin (USDC), both pegged to the US dollar. The common use of these stablecoins is associated with global transactions and trade, thus making them more influential globally.
Stablecoin Instability Could Spill Over Into Global Financial Markets
Sleijpen cautioned that eventually the stablecoins might become systemic. He mentioned that a lot of these are supported by US Treasuries, and therefore they are susceptible to market impacts.
In the case that stablecoins lose their stability, then the assets that support them would have to be sold promptly. This may be a spillover effect on the financial markets, which might make the ECB re-evaluate its monetary policy strategy.
The central bank governor of the Dutch, a founding member of the decision-making body at the ECB, reported that the central bank is in doubt about what it can do to address the increased risk that stablecoins represent.
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He admitted that it might either need a cut in the rate or an increase. Yet the ECB has yet to determine a direction to take. This uncertainty underscores the challenges European regulators confront in managing the growing prominence of digital currencies.
The worries of the ECB regarding stablecoins are not recent. Early in this year, ECB advisor Jurgen Schaaf raised concerns about the potential impact of dollar-pegged stablecoins on Europe’s monetary sovereignty.
ECB Moves Forward with Digital Euro to Protect Financial Stability
Schaaf was worried by the emergence of yield-bearing stablecoins that would steal the deposits of the conventional banks. This has the potential of undermining financial intermediation within the euro area, eventually hitting the credit availability.
To mitigate these threats, the ECB is urging the development of a digital euro. The digital euro would offer a risk-free and sovereign alternative to stablecoins of the private sector.
Recently, the ECB made a significant move in that direction by implementing external providers to help with the creation of essential elements of the digital euro. These providers will assist with fraud prevention, risk management, and secure payment exchanges.
With the continued rise in the usage of stablecoins, the push by the ECB towards the digital Euro will serve as an expression of its desire to ensure the future of the financial system of Europe and to make sure that its monetary power and position are under its control.
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