EU Risk Watchdog Sounds Alarm on Stablecoin Safeguards

In brief

EU regulators have warned that cross-border schemes could create redemption pressures in the bloc, forcing ECB intervention.
The EU has one of the world’s strictest crypto regimes and requires stablecoins to be fully backed by reserves.
The stablecoin market is currently valued at over $300 billion, dominated by U.S. dollar-based tokens.

The European Union’s top financial risk watchdog has called for urgent policy action to address vulnerabilities in stablecoins that straddle the bloc and other jurisdictions, warning of potential systemic shocks if safeguards are not strengthened.

In a statement, the European Systemic Risk Board (ESRB), chaired by European Central Bank (ECB) President Christine Lagarde, warned that “third country multi-issuer schemes – with fungible stablecoins issued both in the EU and outside – have built-in vulnerabilities which require an urgent policy response.”

Stablecoins, designed to maintain a steady value by pegging to assets like currencies or baskets of reserves, have grown into a market worth over $300 billion, according to DefiLlama data. The vast majority are dollar-based, led by Tether’s USDT, which alone commands over 58.53% dominance in the sector.

On prediction market Myriad, launched by Decrypt‘s parent company DASTAN, users anticipate further rapid growth in the sector, placing a 72% chance on the stablecoin market cap topping $360 billion before February.

The EU and stablecoins

The EU has already enacted a tough crypto regulatory regime, requiring stablecoins issued within its borders to be fully backed by reserves, and some countries would like to tighten further.

But the ESRB and ECB warn that multi-issuer schemes involving non-EU players tilt the playing field. Investors facing turbulence may prefer to redeem in the EU, where protections are stricter, but reserves inside the bloc might not be sufficient, potentially forcing the ECB to intervene.

The warning reflects wider global unease over the sector from traditional finance. In June, the Bank for International Settlements flagged risks to monetary sovereignty and capital flight from emerging markets, while also pointing to repeated breakdowns in stablecoins’ ability to hold their pegs.

Other jurisdictions are pursuing different paths. In the United States, President Donald Trump signed the GENIUS Act in July, establishing a first formal framework for stablecoin issuance. While it bans issuers from paying interest, exchanges remain free to offer yields, sparking fierce debate between banks warning of mass deposit flight and crypto groups dismissing the threat as exaggerated.

In Hong Kong, legislation that took effect Aug. 1 has been followed by multiple regulatory warnings. Authorities noted sharp, speculation-driven market swings tied to stablecoin licensing rumors and cautioned investors against undue risks. Last month, they reiterated that no yuan-pegged stablecoins have been approved in the city.

Last month, the Bank of England proposed a cap on the amount of stablecoins that individuals and businesses could hold in the UK, with individuals limited to between £10,000 and £20,000 ($13,600–$27,200) and businesses capped at £10 million ($13.6 million). The proposal faced widespread pushback from crypto advocacy groups and businesses, with Coinbase’s vice president of international policy dismissing it as “bad for UK savers, bad for the City and bad for sterling.”