European monetary sovereignty faces a growing threat from the rapid expansion of US dollar-backed stablecoins, according to a senior European Central Bank official.
In a blog post, ECB advisor Jürgen Schaaf highlighted that US dollar-denominated stablecoins now account for 99% of the global stablecoin market, worth approximately $230 billion, while euro-based alternatives are tiny in comparison. He warned that without decisive action, Europe risks losing control over monetary conditions.
Growing use
Stablecoins are cryptocurrency tokens designed to maintain stable value by being backed by traditional assets such as government bonds. The largest issuers, Tether (USDT) and Circle (USDC), invest customer funds primarily in US Treasuries to back their dollar-pegged tokens. Some major US companies from retailers to credit card providers are already integrating stablecoins into their operations.
Schaaf argues that the US administration is seeking 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
High stakes
The stakes are rising following the passing of the GENIUS Act, which establishes a federal framework for stablecoins in the US. Market analysts project this could drive stablecoin supply from $230 billion today to $2 trillion by 2028. The US GENIUS Act is “broadly in line” with the EU’s MiCAR legislation, but is “more lenient” in some areas, the official said.
The growing confidence in stablecoins means they are starting to “come out of their niche” and become “more entangled” with TradFi, he said, adding that a disorderly collapse could reverberate across the financial system. Specifically, interest-bearing stablecoins that would divert deposits from traditional banks could pose particular risks to financial stability.
Policy responses
The ECB official outlined several policy responses Europe should consider, including:
Support for euro-denominated stablecoins – properly regulated euro stablecoins could serve legitimate market needs while reinforcing the euro's international role.
Digital euro development – the planned digital euro could serve as a "robust line of defence" for Europe.
Blockchain infrastructure investment – increased use of distributed ledger technology in wholesale financial markets is critical.
Global regulatory coordination – stronger international cooperation on regulation.
Weakening ECB control
Schaaf warned that widespread adoption of USD stablecoins in Europe could weaken the ECB's control over monetary conditions, potentially creating dynamics similar to those seen in economies where the dollar becomes widely used alongside local currencies.
Despite the risks, Schaaf said he sees potential for Europe to emerge stronger from the current disruption.
