Stablecoins ‘One Failure Away’ From Damaging Financial System, Warns ECB

Key Takeaways

• The ECB warns that the extreme concentration of stablecoins poses financial stability risks.
• Growing links to U.S. Treasuries raise systemic concerns.
• Stablecoin growth could pressure banks and expose regulatory gaps.

The European Central Bank has warned that the rapid expansion of stablecoins, particularly those dominated by Tether and Circle, poses significant risks to financial markets and the banking system.

In a new report , the ECB said the heavy concentration of U.S. stablecoins means the failure of just “one entity” could cause widespread trouble for the markets.

Stablecoin Risks Mount as Market Concentrates

The ECB stated that the vulnerabilities of stablecoins are rooted in their reliance on investor confidence and the assumption that tokens can always be redeemed at par.

A loss of that confidence “can simultaneously trigger a run on a stablecoin and cause a de-pegging event”, the report said.

Tether’s USDT and Circle’s USDC now account for nearly 90% of the global supply.

The ECB described this concentration as difficult to reverse due to “inherent interchangeability frictions across different stablecoins.”

This extreme dominance means “the failure of just one entity could have a widespread impact, even in the absence of a systemic stablecoin crisis.”

The central bank also highlighted the growing scale of stablecoins’ reserves, noting that USDT and USDC rank among the largest holders of short-term U.S. Treasury bills.

A run, the term for when there’s a mass withdrawal, could force issuers to liquidate assets rapidly, potentially affecting “the functioning of U.S. Treasury markets,” the ECB said.

Wider Implications for Banks

If stablecoins gain broader adoption, the ECB warned they could lead to retail deposit outflows from banks, replacing stable and insured household deposits with more volatile wholesale funding.

Such shifts would leave banks “more vulnerable to shocks”, especially if stablecoin-related deposits were withdrawn during periods of stress.

Differences in global regulatory regimes were flagged as a significant source of risk for the euro area.

The ECB stated that discrepancies in reserve rules enable “regulatory arbitrage,” including instances where an EU and non-EU entity jointly issue a fungible stablecoin.

This could leave EU-regulated issuers with “insufficient reserve assets… to fulfil the combined redemption requests.”

“Such risks call for additional safeguards, imposing preconditions that must be met before EU market access is authorised,” the report read.

Record Owners, But Uses Remain Narrow

The combined market capitalisation of all stablecoins has exceeded $280 billion, equivalent to roughly 8% of the total crypto-asset market.

Almost all of that supply, around 99%, is denominated in U.S. dollars, while euro-denominated stablecoins account for a marginal amount of roughly €395 million.

The rise has been fuelled by investor demand and new regulatory clarity.

The EU’s Markets in Crypto-Assets Regulation (MiCAR), fully implemented last year, and new legislation in the United States and Hong Kong have helped formalise rules for issuers.

For now, stablecoins remain overwhelmingly used for crypto trading, with around 80% of all trades executed on centralised platforms involving stablecoins.

Other use cases, such as cross-border payments or retail adoption in emerging markets, remain small.

The ECB noted that organic retail-sized transfers account for only “around 0.5% ” of volumes.

Despite their growth, the ECB stated that stablecoins have not yet led to significant deposit outflows in the euro area.

But with supply expanding…