In a speech today, European Central Bank (ECB) President Christine Lagarde explored the growing adoption of stablecoins and questioned the need to follow the US lead in promoting euro stablecoins. She split her analysis into monetary and technical functions. Lagarde said, “once we disentangle those two functions, the case for promoting euro-denominated stablecoins is far weaker than it appears.” The argument is persuasive, but is it complete?
From a monetary perspective, Lagarde acknowledged the relatively low frictions for stablecoin cross border payments and the attraction of holding stable digital currencies for citizens in countries with weak currencies. Plus, recent research shows increased stablecoin issuance translates to lower funding costs for US Treasuries, with the equivalent potential for euro stablecoins and EU funding.
However, she expressed concerns about financial stability if there were a major stablecoin run, not least in the case of stablecoins that are issued out of multiple jurisdictions. For some time the EU has been worried that Europe’s easy stablecoin redemption process could mean that a run could result in foreigners draining EU stablecoin reserves which were intended to be ringfenced for EU residents. Additionally, there’s the issue of a fast take up of stablecoins and their effect on monetary policy. They can divert bank deposits which can impact lending. In her view these tradeoffs can outweigh the potential gains.
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