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Brussels is poised to announce new rules for the fast-growing stablecoin market, shrugging off warnings from the European Central Bank that the standards could destabilise the region’s banks during periods of market volatility.
The European Commission, the EU’s executive arm, is planning to issue formal guidance proposing that stablecoins issued outside the bloc are treated as interchangeable with same-branded versions allowed only on EU markets, according to people briefed on its contents. The announcement was set for the coming days, said a person with knowledge of the situation.
Its public guidance will address a grey area in EU law over this form of cryptocurrency, which acts like digital cash and sits outside the banking system.
It comes after ECB president Christine Lagarde told the European parliament on Monday that “stablecoins . . . pose risks for monetary policy and financial stability [and] must therefore be governed by sound rules, especially when they operate across international borders”.
Stablecoins are intended to track the value of a sovereign currency, usually the US dollar, and are backed by liquid assets held in reserve.
Politicians around the world are quickly updating financial markets rules to account for their rise. There are about $250bn of such tokens in circulation and analysts predict the market will grow tenfold in size in the coming years.
US Treasury secretary Scott Bessent this month said there could be $2tn in circulation globally and their proliferation could “reinforce US dollar supremacy”. The country’s lawmakers are close to agreeing the first rules to oversee the market, known as the Genius act.
But central banks have become increasingly wary of legislation that encourages growth and could contain loopholes on managing risks.
The ECB has voiced concerns that coins issued by the same company in other jurisdictions fungible with EU-issued tokens could potentially put strain on the bloc’s banks in times of market stress.
Under EU rules, stablecoins issued within the bloc must keep most of their reserves in a bank based in the bloc, while holders can redeem their coins for cash directly from the issuer. The ECB said the new rules could increase the risk of a run on reserves, with the potential for contagion among banks, as overseas holders rush to access reserves intended for EU consumers.
If a rush of redemptions “is amplified by large developments and possible difficulties in any stablecoins, the European safeguards, backups, deposits will be exposed”, Lagarde said.
“It gets really tricky when you start thinking about competing international frameworks,” said Diego Ballon Ossio, a partner at Clifford Chance in London.
“Technically, purely from a legal perspective you couldn’t say that the coins are fungible,” he said. “If that’s the case and the regulation is attached to the issuer, then you’ve got this problem. Their fungibility is not specifically defined [in European regulation],” he said.
On Tuesday the Bank for International Settlements said stablecoins “perform badly” on key requirements for being widely used as money, because they are not backed by central banks, lack sufficient guardrails against illicit usage and, unlike banks, do not have the flexibility of funding needed to generate loans.
The issue of non-EU stablecoins has caused friction between the two EU bodies in a series of private meetings this year, in which the commission pushed back against the bank’s concerns.
“A run on a well-governed and fully collateralised stablecoin is very unlikely,” said a commission spokesperson, adding that even if it were to happen, “foreign holders would redeem their tokens in [for example] the US, where the majority of the tokens circulate and the majority of the reserves are held”.
One cryptocurrency executive said the ECB’s strident warnings were in part driven by the bank’s fears that the reserves for a large stablecoin operator could be kept in a country with a relatively small banking system. The ECB’s criticisms were also motivated by a desire to create a central bank-issued digital currency, which would compete with and could potentially undercut stablecoins issued by private companies, the executive added.
To counter some of the risks, the ECB proposed asking other countries to provide legal guarantees that would ensure reserves from other countries could be transferred to the EU in times of crisis, according to people briefed on a closed-door meeting held this month. It also warned that no agreements existed between other countries and the EU on their regulations being of equivalent standard.
However, a commission official rejected the need for guarantees over asset transfers in the meeting, which led an ECB official to ask: “Do we need to trust them blindly that they will transfer the assets [in case of a run on EU reserves]?” the people said.
The commission instead proposed allowing national supervisors to make their own risk assessments and potentially ask for additional safeguards.
“European supervisors issue authorisations in very tight timelines and without enough due diligence,” said Andrea Resti, a professor of financial risk management at Bocconi university in Milan. “Everything would be left to the artisan initiative of national supervisors,” he added.
Additional reporting by Olaf Storbeck in Frankfurt
