Stablecoins May Prompt ECB to Reevaluate Monetary Policy, Warns Key Official

Stablecoins are presenting potential risks to financial stability and inflation in Europe, according to Olaf Sleijpen, the governor of the Dutch central bank. He suggests that the European Central Bank (ECB) may need to reconsider its monetary policy in light of these developments. The rapid growth of dollar-backed stablecoins in the U.S. raises concerns about their systemic relevance, as highlighted in Sleijpen's recent interview with the Financial Times.

Key Takeaways

Threat of Financial Instability: Stablecoins could risk financial stability in Europe, compelling the ECB to change its monetary policy.
Rapid U.S. Growth: The issuance of stablecoins in the U.S. has surged significantly, especially following the enactment of the GENIUS Act.
Significant Market Share: Major U.S. dollar-backed stablecoins like Tether (USDT) and USD Coin (USDC) dominate the market and are increasingly used in trading and cross-border payments.
Possible Market Disruptions: Concerns arise that unstable stablecoins could lead to forced liquidation of underlying assets during economic stress.
ECB's Strategic Response: There is uncertainty about whether the ECB would implement rate cuts or hikes in response to the evolving stablecoin landscape.
Pursuit of a Digital Euro: Instead of stablecoins, the ECB is advocating for a digital euro to ensure a sovereign and secure alternative for Europe’s payment systems.

Stablecoins could force ECB to rethink monetary policy, key official warns.

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Olaf Sleijpen, the governor of the Dutch central bank, has indicated that stablecoins could create risks affecting both financial stability and inflation across Europe. During an interview with the Financial Times, he expressed concerns about the rapid growth in stablecoin issuance within the United States, especially since the signing of the GENIUS Act by former President Donald Trump earlier this year. This legislation has facilitated the private-sector issuance of dollar-backed digital tokens.

Sleijpen stated, “If stablecoins in the US increase at the same pace as they have been increasing... they will become systemically relevant at a certain point.” Indeed, following the implementation of the GENIUS Act, the volume of dollar-pegged digital tokens surged over 48%, exceeding $300 billion. Leading stablecoins like Tether (USDT) and USD Coin (USDC), which are linked to the U.S. dollar, now command the largest share of the global stablecoin market and are increasingly utilized for cross-border payments and trading activities.

The backing of many of these assets by U.S. Treasuries raises alarm due to their sensitivity to rapid sell-offs during economic downturns. Sleijpen warned, “If stablecoins are not that stable, you could end up in a situation where the underlying assets need to be sold quickly,” suggesting that this could lead to significant market disruptions that might require the ECB to “probably have to rethink monetary policy.”

He emphasized the importance of employing financial stability tools as a preliminary defense and acknowledged the unpredictability regarding the ECB's potential response. “I don’t know in which direction we would be going,” he admitted.

Sleijpen's remarks align with ongoing concerns raised by officials within the ECB regarding the swift expansion of the stablecoin market, which many policymakers have not fully anticipated. Earlier this year, ECB advisor Jürgen Schaaf highlighted that the swift rise of dollar-pegged stablecoins endangers Europe’s monetary sovereignty and financial stability, calling for a strategic response to prevent the euro from weakening against privately issued dollar-based tokens.

Schaaf expressed particular concern over the introduction of yield-bearing stablecoins, which could disrupt traditional banking models in deposit-heavy economies like the euro area. “If interest-bearing stablecoins became common... they could divert deposits from traditional banks, which could jeopardize financial intermediation and hamper credit availability,” he noted.

In response to these developments, the ECB is advocating for a digital euro as a sovereign and risk-free option that can stabilize Europe’s payment infrastructure. Last month, the central bank moved closer to this initiative by selecting external providers to assist with critical components of the digital euro project, including fraud and risk management, app development, and the secure exchange of payment information.