ECB Issues Caution About Growing Risks of Stablecoins

The European Central Bank (ECB) has issued a warning regarding the fast growth of stablecoins and their potential risk to financial stability. Although stablecoins currently have a limited presence in the euro area, their interconnectedness with global markets is increasing.

Key Takeaways

The stablecoin market has surpassed $280 billion, with Tether (USDT) and USD Coin (USDC) being the dominant players.
The primary use of stablecoins is for crypto trading rather than real-world payments, with only a minuscule fraction used in retail transactions.
Structural risks include the potential for de-pegging and runs on stablecoin reserves, notably linked to U.S. Treasury backing.
Regulatory discrepancies pose significant concerns for global stability, necessitating consistent global regulatory alignment.

ECB report

The insights are derived from the ECB report titled Stablecoins on the rise: still small in the euro area, but spillover risks loom, authored by Senne Aerts, Claudia Lambert, and Elisa Reinhold. This report investigates the structural vulnerabilities, usage scenarios, and cross-border risks associated with the burgeoning stablecoin ecosystem.

Stablecoin Market Reaches $280 Billion, Led by USDT and USDC

According to the report's authors, the total market capitalization of stablecoins has soared above $280 billion, marking a record high that represents approximately 8% of the entire crypto asset market. The U.S. dollar-pegged stablecoins dominate this space, led by Tether (USDT) at $184 billion and USD Coin (USDC) at $75 billion.

Stablecoin Market

In contrast, stablecoins pegged to the Euro are inconsequential, totaling a mere €395 million, which highlights a major currency imbalance in the market. The ECB attributes this spike in demand partly to the increased regulatory clarity on a global scale, including the recent implementation of the EU’s Markets in Crypto-Assets Regulation (MiCA) and the GENIUS Act.

Crypto Trading as the Main Application of Stablecoins

The ECB report emphasizes that the current stablecoin market is predominantly driven by trading activities rather than actual payments. Approximately 80% of trading on centralized crypto exchanges involves stablecoins, establishing them as a vital settlement asset within the crypto finance sector.

While stablecoins are often mentioned as means for cross-border payments or stores of value in economies experiencing high inflation, evidence for widespread consumer use is limited. Only about 0.5% of stablecoin transactions appear to come from organic retail activities, indicating that real-world use remains very low.

Key Risks: De-Pegging, Runs, and Treasury Market Implications

The report highlights significant vulnerabilities in stablecoins, with de-pegging incidents and redemption runs presenting immediate risks. Major stablecoins are backed by large reserves of traditional financial assets—chiefly U.S. Treasury bills—connecting their growth to global financial markets.

Both USDT and USDC are now among the most significant holders of U.S. Treasuries, with reserve portfolios comparable to some of the world's leading money market funds. A sudden demand for redemptions could lead to a fire sale of U.S. Treasuries, which might disrupt the functioning of this crucial funding market.

According to projections, if the supply of stablecoins continues to grow at its current rate, their market capital may reach $2 trillion by 2028, potentially increasing spillover risks, especially since a small number of issuers control about 90% of the market.

Ongoing Regulatory Concerns

Despite the robust regulations set by MiCA in the EU, inconsistencies in global regulations create a risk of regulatory arbitrage across borders. The ECB highlights the dangers of multi-jurisdiction issuance of fungible tokens, which might leave EU-regulated issuers under-reserved for global redemption demands.

In conclusion, while stablecoins currently have a minor footprint within the euro area, their rapid international expansion and closer ties to traditional financial markets warrant careful observation. The authors advocate for global regulatory coordination, in line with G20 recommendations, to help manage risks of cross-market contagion.