Analysts point out that the EU’s crypto regulation – MiCA – includes safeguards against foreign stablecoins, which, according to them, can also be seen in Lagarde’s admission that “MiCAR is the first line of defense against any attack by US stablecoins, while the digital euro is the second.”
Cryptocurrencies have prompted global financial institutions, especially central banks in developed countries, to look for ways to “digitize” money. The European Central Bank is among the leaders, and recently ECB President Christine Lagarde called on the European Parliament to act quickly to secure legislation for the digital euro.
At the same time, Lagarde stressed her concern for monetary sovereignty, given US President Donald Trump’s executive order on stablecoins. Free digital payment services, availability in any EU country and the possibility of digital payments are among the benefits of the digital euro. Although before last year’s European elections, the adoption of legislation for the digital euro seemed inevitable, the political landscape has changed. For this reason, Lagarde called for the acceleration of digitalization and added: “This debate, however heated – however disturbing it may be – is necessary because we will all be held accountable for historical developments if this project is not at least debated before you in the short term.”
Her comments came in the context of the rapid deployment of stablecoins in the United States. Lagarde praised the American acceptance of the digital currency and the speed of Congressional action, combined with the presidential executive order in March. “I think there is a very strong political motivation to move forward as quickly as possible, decisively. Not only in the United States of America, but also on a much broader basis, for reasons related to sovereignty, for reasons related to the spread of sovereign debt,” Lagarde emphasized.
CONCERN ABOUT STABILITY AND IMPLEMENTATION COSTS
Lagarde again stressed that there is concern about deposits flowing out of banks into stablecoins, which potentially threaten financial stability and monetary policy. But what exactly are stablecoins, how do they differ from crypto assets, and why is there so much concern?
According to the data so far, stablecoins are backed by safe assets such as government bonds and are designed to act as a bridge between cryptocurrencies and the mainstream financial system. Their supporters claim they are more efficient than international bank transfers, but their anonymity has made them popular conduits for drug trafficking and money laundering.
The ECB’s warning reflects concerns among central bankers about the rise of stablecoins. The Bank for International Settlements said last month that stablecoins “perform poorly” as money because they are not backed by central banks, lack sufficient protection against illicit use and lack the funding flexibility needed to generate credit.
Analysts point out that the EU’s crypto regulation – MiCA – includes safeguards against foreign stablecoins, which, according to them, can also be seen in Lagarde’s admission that “MiCAR is the first line of defense against any attack by US stablecoins, while the digital euro is the second.”
RISKS RELATED TO MONEY AND OTHER PAYMENT METHODS
But as the Financial Times writes, the rise of stablecoins pegged to the US dollar threatens to undermine the ECB’s control over monetary policy. Jürgen Schaaf, an adviser in the ECB’s Department for Market Infrastructure and Payments, warned that the rapid adoption of stablecoins could lead the eurozone to conditions similar to “dollarized” emerging economies, where the widespread use of the US dollar could hamper local policymakers’ efforts to set interest rates or control the money supply. “If stablecoins pegged to the US dollar become widely used in the eurozone – whether for payments, savings or settlements – the ECB’s control over monetary conditions could be weakened,” Schaaf wrote in an article published on the ECB’s blog.
According to him, the “disorderly collapse” of stablecoins by the private sector could “reflect throughout the financial system,” making central banks increasingly concerned.
Tether and Circle manage the two largest stablecoins, but the passage of US legislation to regulate the sector this month is expected to pave the way for Wall Street banks to launch their own offerings.
Analysts are concerned about issuing stablecoins that pay interest to depositors because they could siphon money from traditional bank deposits, hindering lenders’ ability to provide credit to the economy. “The risks involved are clear and should not be underestimated,” Schaaf wrote, adding, like Lagarde, that the ECB’s plan to launch a digital euro is “a strong line of defense for European monetary sovereignty.”
According to Schaaf, Trump’s push to promote stablecoins would reinforce the dollar’s global dominance and could lower borrowing costs for the U.S. “For Europe, this would mean higher financing costs relative to the U.S., reduced monetary policy autonomy, and geopolitical dependence,” he wrote.
WHAT IS ATTRACTIVE ABOUT STABLE CURRENCIES
Lagarde points out that higher interest rates in the US could be a reason for more citizens to embrace these new currencies, despite the risks. Although MiCAR prohibits stablecoin interest offers from European crypto asset service providers, crypto-savvy users can bypass this through DeFi or offshore platforms.
MEPs also questioned the costs of implementation. A PwC report this month estimated the costs of the digital euro for European banks at 18 billion euros, noting capacity constraints that could hinder further innovation.
Lagarde said she could not comment on specific estimates due to the lack of transparency in the methodology, adding “that this could be used as a threat and I think it should be aligned with the costs that we estimate.”
Economists say the rise of stablecoins, cryptocurrencies pegged to the US dollar, poses a serious threat to European efforts to strengthen the euro’s global position. Of further concern to policymakers is the rise in the market value of these digital assets, which has more than doubled in less than two years, rising from $125 billion to around $255 billion, with almost 99 percent of that value pegged to the US dollar.
Officials fear that the growing acceptance of stablecoins could strengthen the dollar’s dominance in global finance and dampen hopes that the euro will become a serious competitor. For years, ECB officials have promoted the introduction of a digital euro as the most effective response to the threat posed by foreign digital currencies. The goal is to provide a secure euro-based alternative that would make it easier for citizens and businesses to stay within the eurozone’s monetary system.
