ECB flags stablecoin threat to banks, monetary policy

The European Central ‌Bank (ECB) has said that the spread of stablecoins in the eurozone could reduce bank deposits and the amount of credit they can provide to the real economy, as well as weaken the effectiveness of monetary policy.

In a working paper published last week, the ECB used evidence from the rapid expansion of stablecoins combined with “confidential granular data on euro area banks and their individual borrowers,” to examine the effects of stablecoins on bank intermediation and monetary policy.

The paper reported three main findings: one related to the negative impact on bank deposits and credit, and two focused on how stablecoins, particularly those of the foreign-currency-denominated variety, affect current European Union monetary policy.

The ECB research comes as the stablecoin market continues to hit new heights, with stablecoin payments now accounting for $390 billion annually, based on December 2025 data from blockchain analytics firm Artemis Analytics.

Banking reduced

In terms of the ECB’s key findings in the paper, the first indicated that the growing use of stablecoins could prompt people and firms to shift money from traditional bank deposits into digital assets. A decline in retail bank deposits can, in turn, reduce bank lending to firms.

“Banks rely heavily on deposits as a stable and low-cost source of funding to support lending to households and businesses,” explained the ECB. “When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable.”

In other words, stablecoins can reduce the amount of credit banks provide to the real economy.

However, the ECB did caveat this by saying that these effects are “nonlinear” and depend on the scale of stablecoin adoption, their design features, and their regulatory treatment.

The other key findings in the paper concerned how stablecoins impact existing monetary policy.

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Monetary policy could become less effective

Under the status quo, eurozone banks play a central role in transmitting interest rate changes to households and firms; a shift into stablecoins naturally affects this transmission mechanism.

This represents the first problem for exiting monetary policy, as the ECB pointed out: “We find that stablecoin adoption interfere with multiple monetary policy transmission channels, potentially weakening the predictability of policy actions.”

Essentially, the ECB warned that foreign monetary conditions could be “imported” into the eurozone through stablecoins, which would then weaken the central bank’s control over financial conditions, reduce the effectiveness of traditional monetary policy instruments, and make it harder to stabilize inflation and economic activity, especially during periods of financial stress.

“Banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty,” read the paper.

Since the most prominent and widely used stablecoins are U.S. dollar-denominated, such as Tether and USDC—the top two globally by market cap and transaction volume—this potential risk becomes all the more likely.

Taken together, the ECB said its three main findings underscored the potential for stablecoins to affect the effectiveness of conventional monetary policy in bank-centric economies such as the EU.

So, the question then becomes, what to do about these stablecoin-related issues? On this, the ECB also had something to say.

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Policy implications

On top of the findings, the paper offered some policy suggestions to help mitigate the potential risks associated with the rise in stablecoins.

“These findings highlight the importance of thoughtful regulation,” said the ECB. “Measures such as stronger transparency requirements for stablecoin reserves, robust redemption guarantees, adequate capital buffer to absorb losses and effective oversight can reduce financial risks.”

It also suggested that initiatives such as central bank digital currencies (CBDCs)—in the case of the EU, the “digital euro” project—may offer a public alternative that preserves monetary sovereignty while supporting innovation.

For example, the ECB argued that CBDCs’ holding limits, which stablecoins do not have, can make a difference in protecting banks.

“By capping individual holdings, the digital euro is explicitly framed as a transactional instrument, thereby protecting commercial bank deposits and reinforcing financial stability,” read the paper. “These limits reduce the risk of large-scale deposit migration into central bank money during periods of stress and help preserve the effectiveness of monetary policy transmission.”

The paper concluded by reiterating the ECB’s call for regulatory interventions aimed at mitigating stablecoin risks, saying that the findings “underscore the need for continued monitoring of stablecoins’ evolving role in the financial system and for careful regulatory calibration to balance innovation with monetary and financial stability.”

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