The European Central Bank said increasing stablecoin use may pull money out of bank deposits and weaken the way monetary policy flows through to lending, according to a new ECB working paper.
Growing adoption of stablecoins, which are digital assets often pegged to currencies such as the US dollar or euro, is expected to draw funds away from traditional bank deposits, the ECB said in its latest working paper series, “Stablecoins and Monetary Policy Transmission,” released Tuesday.
“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 said, adding that stablecoins can reduce the amount of credit banks provide to the real economy.
The ECB noted that the effects are nonlinear and vary depending on the scale of stablecoin adoption, their design features and how they are regulated.
The report is part of the ECB’s ongoing efforts to monitor stablecoins, whose market capitalization has more than doubled over the past three years to $312 billion and is projected to reach $2 trillion by 2028.
Stablecoin impact: Banks, monetary policy and why currency matters
To assess the impact of increasing stablecoin adoption on banks, the ECB highlighted a deposit-substitution effect, where households and companies move funds 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 said. “When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable,” it added.
Actual and expected stablecoin market development. Source: ECB (Citigroup, Coinbase, JPMorgan)
The paper also argued that stablecoins can change how policy interest rates affect bank funding costs and lending, with impacts varying by adoption scale, design and regulation.
“We find that stablecoin adoption interferes with multiple monetary policy transmission channels, potentially weakening the predictability of policy actions,” the authors said.
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Currency mix matters for the euro area
The paper also flagged added concerns around the growth of foreign-currency stablecoins, which it said could further weaken the connection between domestic monetary policy and bank lending, with risks amplified when the market is dominated by non-euro-denominated tokens.
ECB officials have previously warned that the spread of dollar-denominated stablecoins could raise questions about monetary sovereignty and the euro’s role in cross-border payments.
The working paper cited data that US dollar-backed stablecoins make up the vast majority of the stablecoin market. Data from CoinGecko shows dollar-pegged tokens are valued at $301 billion, representing 97% of total stablecoin market capitalization at the time of writing.
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