Christine Lagarde, the head of the European Central Bank, warned that the development of euro stablecoins in Europe poses risks for banks and central bank oversight. The popularity of such assets is growing rapidly. Their greater role in transactions and savings requires the reconsideration of methods for ensuring financial stability.
Lagarde speaking at the Banco de España LatAm Economic Forum in Spain on Friday. According to her, stablecoins have already moved beyond the niche crypto market. They are now used as financial instruments of cross-border transactions.
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Euro Stablecoins Raise Concerns for Central Banks
She said this shift has raised concerns for central banks. Lagarde also questioned whether Europe needs Euro stablecoins to support the euro or protect financial stability. Her remarks came as crypto use expands across Europe and other regions.
According to Lagarde, the stablecoin market has expanded from less than $10 billion to $300 billion over the past six years. She stated that the majority of tokens are still pegged to the US dollar. There are also a few companies that also issue them.
Withdrawals may bring down liquidity pressures on the market. A run on Euro stablecoins may lead to similar pressures, among other risks. She said such risks are important since these assets have become more integrated into payment services.
Lagarde noted that Europe had already been proactive in its regulation of cryptocurrency via the MiCA. According to her, the world is now splitting in terms of how it regulates cryptocurrencies. Particularly, the U.S. approach is diverging.
ECB Projects Aim to Secure Digital Settlement Systems
Lagarde stated that Euro stablecoins may hamper the interest rate transmission mechanism of the ECB. Bank deposits may end up in digital private assets, leading to decreased bank lending and policy effects.
Lagarde explained that the function of stablecoins was both monetary and technological. Such characteristics may confuse policymakers in regulating them. Moreover, tokenization markets have not yet developed safe settlement systems for central bank money.
She highlighted ECB initiatives like the Pontes and Appia roadmap. These projects seek to develop settlement systems that will be interoperable in Europe. Lagarde noted that central bank money had to be the key anchor in finance.
Lagarde urged Europe to focus on deepening capital markets rather than encouraging the launch of euro stablecoins. She said innovation should not increase financial fragility. She added that regulation must protect stability while allowing controlled digital development.
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