Nikolas Sargeant
The European Central Bank warned that rising stablecoin adoption could draw funds away from traditional bank deposits and disrupt monetary policy transmission, according to a working paper released Tuesday examining the macroeconomic implications of digital dollar and euro alternatives.
Growing use of stablecoins, digital assets typically pegged to currencies including the US dollar or euro, is expected to reduce retail bank deposits as households and firms shift funds into digital alternatives. The ECB's working paper "Stablecoins and Monetary Policy Transmission" concluded that deposit migration could constrain bank lending to businesses and households.
"Our analysis shows that rising interest in stablecoins is linked to a measurable decline in retail bank deposits and a reduction in lending to firms," ECB staff stated, adding that stablecoins can reduce credit banks provide to the real economy.
The effects vary depending on adoption scale, design features, and regulatory frameworks. The stablecoin market has more than doubled over the past three years to $312 billion and is projected to reach $2 trillion by 2028, creating urgency around understanding potential systemic impacts.
The ECB highlighted a deposit-substitution effect where funds migrate from retail bank deposits to digital assets. "Banks rely heavily on deposits as a stable and low-cost source of funding to support lending to households and businesses," the paper states. "When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable."
The research finds stablecoins can alter how policy interest rates affect bank funding costs and lending. "We find that stablecoin adoption interferes with multiple monetary policy transmission channels, potentially weakening the predictability of policy actions," authors stated.
The paper flags concerns around foreign-currency stablecoins, particularly US dollar-backed tokens, which could further disconnect domestic monetary policy from bank lending. Dollar-pegged stablecoins are valued at $301 billion, representing 97% of total stablecoin market capitalization, raising questions about monetary sovereignty and the euro's role in cross-border payments.
