From hype to hazard: what stablecoins mean for Europe

28 July 2025

By Jürgen Schaaf

Stablecoins are reshaping global finance – with the US dollar at the helm. Without a strategic response, European monetary sovereignty and financial stability could erode. However, in this disruption there is also an opportunity for the euro to emerge stronger. In an era of rising geopolitical fragmentation and rapid digital innovation, stablecoins have emerged as both a symptom and a driver of change in the international monetary and financial system. While initially lauded for their potential to enhance the efficiency of payments – especially across borders – their growing scale and complexity pose strategic challenges. These challenges go far beyond the crypto ecosystem. Central banks and policymakers are having to grapple with what stablecoins mean for financial stability, monetary sovereignty, the smooth functioning of payment systems and international policy coordination. Europe must take decisive action to emerge stronger from these turbulent times.

From the fringes to the financial mainstream

Stablecoins are crypto tokens issued on distributed ledgers (i.e. “on-chain”) aiming to maintain a stable value relative to a traditional asset – typically via a peg to currency such as the US dollar. This is achieved by offering convertibility on demand at par. Stablecoins are inherently different from non-backed crypto assets like Bitcoin and Ether, which lack both intrinsic value and redeemability. Stablecoins can be understood as a bridge between volatile digital assets and traditional monetary systems. Their appeal lies in functioning as a blockchain-based money equivalent which is liquid, globally transferable, and perceived as a stable and solid store of value.

Stablecoins are mostly issued by private companies, with Tether (USDT) and Circle (USDC) being by far the largest (see Chart 1). Customers, who range from individuals to big institutions, provide traditional currency (e.g. US dollars or euros) to these issuers. The issuers then invest that money in safe and liquid assets, such as US Treasuries, to back the stablecoins (their liabilities) to make sure they can be redeemed. The original attractiveness of stablecoins was that they allowed users to quickly move between different crypto-assets and send money across borders (e.g. for remittances) without using the traditional banking system.

The global market is increasingly dominated by US dollar-based stablecoins. These account for some 99% of total stablecoin market capitalisation. In contrast, euro-denominated stablecoins remain marginal – with market capitalisation of less than €350 million. A few initiatives exist, and some European banks are reportedly preparing entries into the market. However, the scale so far is limited.

Chart 1

Size of stablecoins in the crypto-asset ecosystem, January 2020-June 2025

(left-hand scale: USD billions; right-hand scale: percentages)

Stablecoins remain dwarfed by “conventional” financial assets. However, they are starting to come out of their niche and become more entangled with traditional financial institutions – e.g. through custody arrangements and derivative exposures – creating potential threats to financial stability. A disorderly collapse could reverberate across the financial system, and the risk of contagion is a growing concern for central banks.

The advent of stablecoins comes with a stark warning

In its Annual Economic Report 2025, the Bank for International Settlements (BIS) issued a stark warning about stablecoins. Its concerns include the potential for stablecoins to undermine monetary sovereignty, transparency issues and the risk of capital flight from emerging economies. The BIS pointed out that many stablecoins have seen substantial deviations from par, highlighting the “fragility of their peg”.

Besides the inherent fragility of stablecoins, the emerging regulatory divergence is worrying. The United States is advancing its own stablecoin regime through the GENIUS Act, signed into law by President Trump on 18 July. The Act, which could be operational within weeks, introduces a federal framework which, while broadly in line with the EU’s Markets in Crypto-assets (MiCA) Regulation in spirit, as it addresses many of the above-mentioned concerns, is more lenient in some areas. As a result, market analysts project that stablecoin supply could grow from USD 230 billion in 2025 to USD 2 trillion by the end of 2028.

The implications for the euro area are potentially far reaching. On the payments front, stablecoin adoption is gaining traction in remittances and e-commerce. Major US card schemes (Visa and Mastercard) are already integrating stablecoins into their global offerings. Similarly, some of the biggest merchants in the United States (Walmart and Amazon) are exploring the use of stablecoins. They could potentially shift their high volumes of cash and card transactions, handling them outside the traditional financial system.

Moreover, stablecoins can serve as settlement assets. They are commonly used for settling trades in decentralised finance, crypto exchanges and tokenised asset markets, and for cross-border payments. In emerging institutional use cases, they support delivery-versus-payment and interbank transactions. Their appeal lies in speed, global accessibility and interoperability. However, they pose risks around regulation, counterparty exposure and integration with traditional systems.

Finally, some platforms offer interest on stablecoin holdings, although stablecoins as such do not normally offer interest. Income can also be generated by lending stablecoins, providing liquidity, or through “yield farming”. All of these generate a return, similar to a savings account, albeit with higher risks. The payment of interest gives stablecoins a resemblance to money market funds. If interest-bearing stablecoins became common and more businesses started using them, they could divert deposits from traditional banks, which could jeopardise financial intermediation and hamper credit availability. This would be a bigger issue in Europe, where banks play a central role in the financial system and deposits are their main source of refinancing. Such a shift could pose risks to financial stability.

Should US dollar stablecoins become widely used in the euro area – whether for payments, savings or settlement – the ECB’s control over monetary conditions could be weakened. This encroachment, though gradual, could echo patterns observed in dollarised economies, especially if users seek perceived safety or yield advantages that are not available in euro-denominated instruments. Such dynamics would be difficult to reverse given the network character of stablecoins and the economies of scale in this context. The larger their footprint, the harder these would be to unwind. If the use of US dollar-denominated stablecoins continues to increase through traditional channels, they may compete directly with euro-based instruments in cross-border transactions. In tokenised settlement, where a reliable digital cash equivalent is key, US dollar stablecoins may cement their early dominance unless credible euro alternatives materialise. Such dominance of the US dollar would provide the United States with strategic and economic advantages, allowing it to finance its debt more cheaply while exerting global influence. For Europe, this would mean higher financing costs relative to the United States, reduced monetary policy autonomy and geopolitical dependency.

The US Administration has made it clear – through executive orders, congressional testimony and social media – that its support for stablecoins goes beyond just encouraging technological innovation. The goal is twofold: to protect the US dollar’s global dominance by expanding its use on digital platforms worldwide; and to reduce borrowing costs by increasing demand for US Treasuries through stablecoin reserve holdings.

What are the options for Europe?

There is certainly no room for complacency, and several policy levers are on the table.

First, more support could be provided for properly regulated euro-denominated stablecoins. While the neutrality of public institutions is often preferred, a strategic blind spot in this space could prove costly. Euro-based stablecoins, if designed to high standards and effective risk mitigation, could serve legitimate market needs. They could also reinforce the international role of the euro.

Second, the Eurosystem’s digital euro project and private sector innovations are complementary elements in a broader European digital payments strategy. In point-of-interaction payments, the digital euro promises to be a robust line of defence of European monetary sovereignty.

Third, increased use of distributed ledger technology (DLT) in wholesale financial markets is critical to maintaining relevance in the future financial infrastructure. While domestic wholesale payments have become increasingly efficient, cross-border payments still face challenges. They come with considerable costs and delays, partly because banks are scaling back their use of traditional correspondent banking.

DLT offers improvements for both types of payment. In domestic contexts, for instance, it enables the settlement of tokenised financial assets directly in central bank money on a shared platform or via bespoke interfaces. The Eurosystem’s recently announced short-term and long-term initiatives – Pontes and Appia – are crucial contributions in this area.

Finally, stronger global coordination on stablecoin regulation is pivotal. Without consistent rules, the current fragmentation may persist. If we forgo a common approach, we risk fuelling instability, regulatory arbitrage and global US dollar dominance.

The euro – a bedrock for others to build on

In sum, stablecoins are no longer a niche curiosity. They are becoming integral to digital finance. As such, their design, governance and currency denomination might shape the future monetary landscape.

The associated risks are obvious – and we must not play them down. Non-domestic stablecoin’s challenges range from operational resilience, the safety and soundness of payment systems, consumer protection, financial stability, monetary sovereignty, data protection, to compliance with anti-money laundering and counter-terrorism financing regulations.

However, the current uncertainty also offers a unique opportunity for Europe. In contrast to the political volatility and regulatory divergence elsewhere, Europe’s stable institutional framework and rules-based approach provide a solid foundation for trust. If the Eurosystem and the European Union can build on this advantage – through robust regulation, infrastructure investment and digital currency innovation – the euro could emerge from this period of change as a stronger currency. In a world of shifting sands, the euro has the potential to be the bedrock on which others can build.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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