A new analysis from the European Central Bank (ECB) warns that the growing adoption of stablecoins could siphon deposits from traditional banks, potentially disrupting the flow of credit to the real economy and complicating the transmission of monetary policy.
In a working paper titled “Stablecoins and Monetary Policy Transmission,” ECB staff examined the implications of rising stablecoin use. They found a “measurable decline in retail bank deposits” linked to increased stablecoin interest, which in turn correlates with reduced lending to firms. The authors state that this deposit-substitution effect can constrain the amount of credit banks extend to households and businesses.
How Stablecoins Could Disrupt Bank Funding and Lending
The core mechanism identified is a shift in where households and corporations hold their funds. Banks rely heavily on stable, low-cost retail deposits to fund their lending activities. If these deposits move into stablecoins—digital assets typically pegged to currencies like the US dollar or euro—banks may need to replace them with more expensive and volatile wholesale funding from markets.
“Banks rely heavily on deposits as a stable and low-cost source of funding to support lending to households and businesses,” the paper explains. “When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable.” This dynamic could raise banks’ funding costs and, consequently, the cost of loans for the broader economy.
Nonlinear Effects and the Role of Design
The ECB emphasizes that the impact is not linear. The magnitude of the effect depends heavily on the scale of stablecoin adoption, the specific design features of the tokens (such as their redemption mechanisms and reserve assets), and the regulatory framework governing them. Furthermore, the paper argues that widespread stablecoin use can interfere with the traditional channels through which central bank policy rates influence bank lending rates and economic activity, potentially making monetary policy less predictable.
Currency Choice: The Euro Area’s Specific Vulnerability
The paper flags a particular risk for the eurozone: the dominance of foreign-currency stablecoins, especially those pegged to the US dollar. Data from CoinGecko cited in the report shows that dollar-backed stablecoins represent approximately 97% of the total stablecoin market capitalization, valued at around $301 billion at the time of writing.
ECB officials have previously cautioned that the proliferation of dollar-denominated stablecoins could erode monetary sovereignty and diminish the euro’s role in cross-border payments. The working paper reiterates this concern, noting that when the stablecoin market is dominated by non-euro tokens, the link between domestic monetary policy and bank lending within the euro area could be further weakened.
The stablecoin market has grown rapidly, with total market capitalization more than doubling over the past three years to $312 billion. Some industry projections, such as those cited from Citigroup, Coinbase, and JPMorgan in the ECB’s chart, suggest it could reach $2 trillion by 2028.
Actual and expected stablecoin market development. Source: ECB (Citigroup, Coinbase, JPMorgan)
This ECB working paper contributes to the ongoing regulatory and oversight debate surrounding stablecoins, highlighting that their implications extend far beyond payment efficiency into the foundational mechanics of banking and monetary control.
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