Stablecoins ‘One Failure Away’ From Destabilizing US Financial System, Warns European Central Bank

Core Insights - The European Central Bank (ECB) has raised concerns about the rapid growth of stablecoins, particularly those from Tether and Circle, indicating significant risks to financial markets and the banking system [1][7] - The concentration of U.S. stablecoins, with Tether's USDT and Circle's USDC accounting for nearly 90% of the global supply, poses a systemic risk where the failure of a single entity could lead to widespread market disruption [2][3] Group 1: Risks of Stablecoins - The vulnerabilities of stablecoins stem from their dependence on investor confidence and the assumption of redeemability at par, with a loss of confidence potentially triggering a run on stablecoins and a de-pegging event [2][4] - The ECB noted that the extreme dominance of a few stablecoins makes it difficult to reverse this concentration due to "inherent interchangeability frictions" [3] - A mass withdrawal from stablecoins could force issuers to liquidate assets quickly, impacting the functioning of U.S. Treasury markets [4] Group 2: Implications for the Banking Sector - The ECB warned that increased adoption of stablecoins could lead to retail deposit outflows from banks, replacing stable deposits with more volatile wholesale funding, making banks more vulnerable to shocks [5] - Regulatory discrepancies between global regimes could lead to "regulatory arbitrage," particularly when EU and non-EU entities jointly issue fungible stablecoins [6] - The ECB highlighted that EU-regulated issuers might face risks of having insufficient reserve assets to meet combined redemption requests, necessitating additional safeguards before granting market access [8] Group 3: Market Overview - The total market capitalization of all stablecoins has surpassed $280 billion, representing approximately 8% of the total crypto-asset market [9]