Overview
The European Central Bank cautioned European Union finance ministers on Friday that proposals to expand the issuance of euro-denominated stablecoins could weaken bank funding stability and complicate the central bank’s ability to manage interest rates.
The proposal
A policy paper prepared by Brussels-based think tank Bruegel recommends easing liquidity requirements for crypto issuers and contemplates granting those issuers potential access to ECB funding. The stated aim of the Bruegel proposal is to help Europe develop a stablecoin market, which the paper notes is currently dominated by dollar-based tokens.
Presentation to policymakers
Bruegel authors Lucrezia Reichlin, Bo Sangers and Jeromin Zettelmeyer presented the ideas at an informal gathering of EU finance policymakers in Nicosia, Cyprus, on Friday. The presentation formed part of discussions among finance ministers and other officials about how to foster a euro-denominated stablecoin sector.
Central bank concerns
Central bankers at the meeting, including ECB President Christine Lagarde, registered opposition to the proposal. Their concerns centered on the potential for these measures to make bank deposits less stable, with knock-on effects for the resilience of the banking sector and the central bank’s control of interest rates.
Funding mechanics and policy implications
Officials highlighted the mechanics by which stablecoin issuance can affect bank funding. When a stablecoin is issued, funds from the buyer move to the issuer’s account rather than remaining in retail deposit accounts. That shift creates a less stable source of funding for banks compared with traditional deposits.
Policymakers warned that if stablecoins were adopted on a large scale, the resulting outflow of deposits could accelerate disintermediation - the migration of financial activity away from banks - and reduce banks’ capacity to lend. They also cautioned that these developments could raise banks’ funding costs and make it harder for the ECB to steer interest rates.
Outlook
The debate reflects a tension between efforts to promote a euro-denominated digital payments ecosystem and concerns from central bankers about preserving deposit stability and effective interest rate transmission. The discussion in Nicosia brought these competing priorities into direct focus.
Note: The information in this article reflects the proposal presented and the reactions reported from the meeting; it does not include decisions or policy changes beyond those statements.