Jürgen Schaaf, an economist and advisor to the European Central Bank’s Market Infrastructure and Payments division, says more support should be provided for properly regulated euro-denominated stablecoins to ward off the threat posed by US dollar-backed tokens.
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US dollar-based stablecoins currently account for some 99% of total stablecoin market capitalisation. In contrast, euro-denominated stablecoins remain marginal – with market capitalisation of less than €350 million.
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.
Given their growing scale and complexity, stablecoins also present knotty challenges for financial stability, monetary sovereignty, the smooth functioning of payment systems and international policy coordination
Stablecoins still remain dwarfed by ‘conventional’ financial assets. However, they are starting to come out of their niche and become more entangled with traditional financial institutions, creating potential threats to financial stability.
Says Schaaf: “A disorderly collapse could reverberate across the financial system, and the risk of contagion is a growing concern for central banks.”
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’.
The emergence of interest-bearing stablecoins also throws up more challenges, in that, if more business 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.
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, warns Schaaf.
“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,” he says. “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.”
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.
If Europe is to come unscathed thropugh the maelstrom, policy makers must adapt their thinking and embrace the coming disruption, says Schaaf.
“While the neutrality of public institutions is often preferred, a strategic blind spot in this space could prove costly,” he says. “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.”
He contends that Europe’s stable institutional framework and rules-based approach provide a solid foundation for mitigating the risks posed.
“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.,” he concludes”In a world of shifting sands, the euro has the potential to be the bedrock on which others can build.”