A recent article published by the European Central Bank warns of potential financial stability risks of stablecoins if they grow rapidly, as currently forecast. The authors note that stablecoins are not currently widely used for real world transactions in the Euro area, nor are they causing an outflow of bank deposits. EU issued stablecoins total €395 million ($439m), compared to around $280 billion in total stablecoin issuance with dollars having 99% dominance. Their concern is the potential for stablecoin growth and interconnectivity with the financial system, resulting in the need to monitor the digital currencies closely.
Among the various stability risks, one regulatory challenge has attracted particular attention in Europe: same-brand stablecoins issued across multiple jurisdictions. The concern is that generous redemption rights in the EU could encourage foreign holders of stablecoins to attempt to redeem them via the EU, potentially reducing the reserves available to EU holders. However, this point was not labored in the article.
Instead, it focused on the range of stablecoin risks, such as the dominance of two stablecoins and their potential to impact the US market for Treasuries in a crisis. Regarding the issue of losing deposits to stablecoins, Europe’s MiCA regulation has some bank protection, given a portion of stablecoin reserves must be held at commercial banks. However, the paper notes that wholesale deposits are far more flighty than retail deposits, which presents a risk for banks. It doesn’t mention that MiCAR has multiple safeguards that prevent both stablecoin issuers and individual banks having too great an exposure to each other. For example, a stablecoin issuer can’t hold more than 10% of reserves at a single large bank, or 5% in the case of a small bank. Nonetheless, for a large stablecoin, that could result in a significant bank deposit.
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