REGULATION | European Central Bank Warns EU Against Easing Euro-Stablecoin Rules to Avoid Destabilizing Banking Industry

The European Central Bank (ECB) has rejected proposals aimed at boosting the euro stablecoin market warning that loosening rules for issuers could threaten financial stability and weaken the central bank’s control over monetary policy, according to people familiar with the discussions.

The debate took place during a meeting of European Union finance ministers in Nicosia, Cyprus where policymakers discussed recommendations from Brussels-based think tank, Bruegel, to strengthen Europe’s position in the fast-growing stablecoin market which remains dominated by dollar-backed tokens.

Bruegel had proposed easing liquidity requirements for euro stablecoin issuers granting them access to ECB funding facilities and allowing the central bank to act as a lender of last resort in times of market stress. ECB President, Christine Lagarde, and other officials opposed the measures arguing they could accelerate deposit outflows from traditional banks and complicate interest-rate management.

ECB officials also warned that broader adoption of stablecoins could reduce banks’ lending capacity by draining retail deposits while creating risks of investor runs on reserve assets during periods of market turmoil.

The pushback comes as European policymakers grow increasingly concerned about what they describe as ‘digital dollarisation,’ with dollar-linked stablecoins accounting for the vast majority of the roughly $300 billion global stablecoin market. Euro-denominated stablecoins currently represent only a small fraction of the sector.

The ECB has instead continued to champion its proposed digital euro project which policymakers see as a safer alternative to privately issued stablecoins. The central bank is targeting a potential launch near the end of the decade pending approval from EU lawmakers.

The debate comes days after Amsterdam-based fintech, Qivalis, said 37 European banks had backed its planned euro stablecoin initiative highlighting growing pressure on European institutions to compete with U.S.-based crypto payment infrastructure.

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