ECB warns about risks of so-called stablecoins for European banks. This increase in digital investments could lead to an outflow of funds from private customers. Further danger threatens if investors lose confidence.
The European Central Bank (ECB) sees increasing risks from so-called stablecoins for banks in the eurozone. Significant growth in digital assets linked to currencies such as the dollar could drain banks’ valuable retail customer deposits, the central bank warned in a financial stability report.
“As a result, an important source of financing for banks will be lost and their overall financing will be more vulnerable to fluctuations,” the ECB said.
What are stablecoins?
Stablecoins are digital means of payment whose value is often tied to classic currencies such as the dollar or euro. “It’s like the chips you get in a casino. I can’t put real money on the table, I have to exchange it,” explains Peter Bofinger, professor of economics, money and international economic relations at the University of Würzburg tagesschau.de.
This term is based on the English word “stable” which means “steady” or “stable”. Unlike other digital currencies, strong price fluctuations should be ruled out.
Its market value now exceeds $280 billion. Stablecoins are intended as a store of value and for cross-border payments. However, the real use lies in purchasing crypto assets, according to the ECB. According to the report, around 80 percent of all trades made on centralized crypto trading platforms worldwide are done using stablecoins.
Investor rush as the main risk
According to the monetary authority, the entire stability of financial markets could be threatened. The main drawback of stablecoins is that investors lose confidence that they can be redeemed for equivalent value, the ECB wrote. The main risk associated with stablecoins is the possibility of investor invasion.
The two largest stablecoins are the largest holders of US government bonds. Their asset reserves are comparable to those of the 20 largest money market funds. “A decline in these stablecoins could trigger a sale of their reserve assets, which could affect the functioning of the US Treasury market,” the ECB said.
For example, if foreign exchange reserves consist of US government bonds that must be quickly converted into money, this could put downward pressure on bond prices and cause yields to rise – thereby causing turmoil in the bond market, which would impact the entire financial market.
The Eurozone is also at risk
Such a move could also affect the eurozone if EU companies and third country companies jointly issue convertible stablecoins. As EU regulations are stricter, investors will likely choose European issuers for redemptions.
This may result in EU issuers not having enough reserve assets under the supervision of EU authorities to meet all redemption requests. This will increase the risk of hurricanes in the European Union.
