ECB Once Again Warns: Stablecoins Pose a Threat to Global Financial Stability

The European Central Bank is sounding the alarm again. In its latest preliminary financial stability report, the ECB labeled stablecoins as a potential global risk. Although the situation appears stable for now, the bank warns that their rapid growth and expanding use cases could change the landscape very quickly. According to the ECB, if people begin shifting large portions of their bank deposits into stablecoins, banks could lose a crucial source of funding. This would leave the financial sector more exposed and dependent on volatile capital flows, increasing systemic vulnerability. The warning comes just weeks after the U.S. approved the GENIUS Act, legislation that officially recognizes stablecoins under federal law. The result was an immediate surge in total stablecoin market capitalization, pushing it to a record 280 billion dollars.

ECB Calls for Global Rules Before It’s Too Late Because stablecoin activity naturally spans multiple jurisdictions, the ECB cautions that the world is entering a phase of regulatory arbitrage — where companies exploit weaker rules in certain countries to avoid stricter oversight elsewhere. The ECB argues that the international community urgently needs harmonized global regulations for stablecoins.

Without them, issuers will simply migrate to whatever jurisdiction gives them the easiest path. One of the bank’s biggest concerns is the rise of multi-issuer systems, where stablecoins are released jointly by entities based inside and outside the European Union.

The ECB warns that these structures pose significant risks without strict controls. The institution therefore recommends implementing “additional safeguards,” which must be met before a stablecoin is allowed to enter the EU market.

ESRB Goes Further: Calls for a Full Ban on Certain Stablecoins The European Systemic Risk Board (ESRB) is pushing an even stricter line — advocating for a complete ban on multi-issued stablecoins within the EU.

The proposal has already been backed by central bank governors and senior EU officials. Although not legally binding, the recommendation places strong pressure on regulators to either comply or justify why they won’t. The ESRB acknowledges an alternative approach involving extremely tight protective measures but describes it as a less suitable option. A major supporter of the tougher stance is Christine Lagarde, the President of the ECB and Chair of the ESRB. Lagarde has repeatedly warned that stablecoins linked to foreign assets present serious legal, operational, liquidity, and financial stability risks for the EU.

American Firms Circle and Paxos Face Growing Uncertainty in Europe Two U.S. companies — Circle and Paxos — may become direct targets of the proposed restrictions.

Both are fully licensed to operate in the EU: Circle is supervised in France, while Paxos falls under Finnish oversight. However, both firms remain headquartered in the United States, whose regulatory approach to crypto has been far more lenient — something that has raised concerns among European officials. The ECB also dislikes that the majority of the reserves backing Circle’s and Paxos’s stablecoins are held in U.S.-denominated assets, including short-term Treasury bills.

In practice, this means that while the stablecoins circulate inside Europe, the money behind them is locked in the American financial system — in conflict with the EU’s Capital Markets Union goals, which aim to keep investment flows within Europe.

Digital Euro on Hold While Regulators Demand Clarity The ECB has been working on a central bank digital currency — a digital version of the euro — since 2021. However, the project has stalled pending clearer legal foundations.

Meanwhile, European regulators are increasingly calling for a decisive legal framework. Last month, Italy’s central bank urged the European Commission to finally settle the legal questions surrounding cross-border stablecoins and prevent regulatory loopholes before the market grows even larger.

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