Lagarde Warns ECB Against Euro Stablecoins Due to Financial Stability Risks

European Central Bank (ECB) President Christine Lagarde has highlighted potential risks associated with euro-denominated stablecoins, which have seen a significant increase in market value over the past six years. The $300 billion global stablecoin market is predominantly dollar-dominated, with Tether and Circle controlling a substantial share of it.

Lagarde's comments were made at the Banco de España Latam Economic Forum in Roda de Bará, Spain, where she emphasized that euro stablecoins operating under the EU's Markets in Crypto-Assets Regulation (MiCAR) could generate additional demand for euro-area safe assets. However, she argued that two main risks outweigh any potential benefits: financial stability and monetary policy transmission.

The first risk lies in the fact that stablecoins are private liabilities whose backing can come under sudden pressure during periods of stress, as highlighted by the 2023 collapse of Silicon Valley Bank (SVB). When SVB collapsed, Circle disclosed that $3.3 billion of USDC's reserves were held there, and USDC briefly traded at $0.877, more than 12 cents below its $1 peg.