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The ECB warns against dollarized stablecoins and their risks for Europe

By Telemac

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The ECB warns against dollarized stablecoins and their risks for Europe

Christine Lagarde, president of the European Central Bank, delivered a stark warning about stablecoins such as Tether and USDC during a speech at the Banco de Espana LatAm Economic Forum in Spain on May 8, 2026. With the stablecoin market exceeding $300 billion and near-total dominance of the US dollar, the central banker has alerted Europe: copying the American dollarized token model would be a major strategic error, likely to weaken the continent’s financial and monetary sovereignty.

A $317 billion market almost entirely dollarized

Stablecoins have experienced spectacular growth over the past six years. Rising from under $10 billion to more than $317 billion today, these tokens represent payment promises denominated in fiat currency issued on public blockchains. Yet nearly 98% of these assets are denominated in US dollars, and approximately 90% of the market is controlled by two US-based companies: Tether, issuer of USDT, and Circle, issuer of USDC.

This exceptional concentration raises fundamental questions about the growing dependence of the global financial system on these American private actors. Stablecoins have begun to encroach on cross-border payments, e-commerce transactions and corporate treasury flows, without European monetary authorities having truly assessed the consequences of this gradual digital dollarization.

With such a large mass of capital circulating on public blockchains and indexed to the dollar, the potential impact on European monetary policy deserves closer examination. The capital flows associated with stablecoins have reached a level such that the ECB has decided to sound the alarm now.

Two structural risks identified by the ECB

In her analysis, Christine Lagarde decomposed the functioning of stablecoins into two distinct functions that must be carefully differentiated to avoid misjudgment. The monetary function aims to extend the international reach of reserve currencies by facilitating access to cross-border payment infrastructure and the holding of currencies outside their home jurisdiction. The technological function enables the execution and settlement of transactions on distributed financial infrastructures, the famous blockchains.

The ECB believes this confusion between the two functions has led to a harmful misanalysis. Advocates for euro stablecoins argue that Europe must actively promote euro-denominated versions to avoid digital dollarization. But for Lagarde, this argument does not hold: the technological function can be replicated by public infrastructure from central banks, while the monetary function introduces unacceptable risks for financial stability.

Financial instability risk

Stablecoins are private liabilities whose value depends on the credibility of their backing and their liquidity. During periods of doubt, redemption demands can become sudden and self-reinforcing, creating deflationary spirals that are difficult to control. The example of Silicon Valley Bank in March 2023 illustrates these dynamics in concrete terms. Circle had exposed $3.3 billion of USDC reserves in this American bank, causing a brief break in parity. USDC had fallen to $0.877, a drop of more than 12 cents from its theoretical price.

While such episodes remained limited in duration and were quickly resolved, they reveal the structural fragility of the model. As Christine Lagarde pointed out: « At scale, such dynamics can transmit stress to underlying asset markets. The promise of par redemption depends on the very market confidence that can vanish when financial stability deteriorates, and a mass redemption can accelerate that deterioration. »

Risk for monetary policy transmission

The second major risk concerns the transmission of monetary policy in the euro area. When retail deposits migrate to non-bank stablecoins and return to banks as wholesale funding, the transmission channel narrows considerably. Banks lend less, or less efficiently, and the pass-through from policy rates to the real economy weakens.

This mechanism is particularly sensitive in Europe, where banks represent the dominant source of credit. A large-scale migration of deposits to dollar-denominated stablecoins would weaken the role of European institutions as financial intermediaries and reduce the effectiveness of the ECB’s monetary policy decisions. This is not a theoretical risk: research conducted by the Frankfurt institution shows that the transmission effect would decrease considerably in the event of massive deposit substitution.

Why the GENIUS Act changes the game in the United States

On the other side of the Atlantic, the United States has adopted a radically different and highly structured approach. The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act), signed by President Donald Trump in July 2025, created the first comprehensive regulatory framework for dollarized stablecoins. The legislation is explicitly presented as a means to « ensure the continued dominance of the US dollar » and support demand for American Treasuries worldwide.

The text requires stablecoin issuers to comply with very strict standards: full backing in real dollars held in custody, reserves in short-term Treasuries, monthly public attestations and regular annual audits. Algorithmic stablecoins are simply prohibited on American soil. In practice, the law structures an institutionalized demand for American debt securities, with stablecoin reserves partly consisting of US Treasury bonds.

With market data showing that 98% of global stablecoins are already denominated in dollars and federal regulation consolidating this trend, the United States has built a considerable structural advantage. Private capital flows now transit through these issuers and feed demand for American public debt, thereby reinforcing the dollar’s international position in the global economy.

Europe charts its own path with digital

Faced with this observation, the ECB advocates a fundamentally different and more cautious strategy. Rather than attempting to compete with dollarized stablecoins by launching private tokens in euros, the institution proposes first building the public infrastructure that will serve European objectives in the long term. The central idea is to allow alternative instruments, including stablecoins, to operate within a secure framework anchored by central bank money.

The Pontes project, due to come online in September 2026, represents the first concrete realization of this strategy. This system will link platforms based on distributed ledgers to the ECB’s TARGET system, making it possible to settle transactions in central bank money on tokenized infrastructures without going through traditional banking institutions. Tests conducted in 2024 demonstrated the feasibility of the concept: 50 transactions carried out in nine different jurisdictions for a total value of approximately 1.6 billion euros.

The Appia roadmap, published in March 2025, sets the goal of a fully interoperable European tokenized financial ecosystem by 2028. This ambitious framework would allow tokenized deposits, MiCAR-compliant euro instruments and central bank money to operate in a secure and standardized interoperable environment. Lagarde stated emphatically: « When central bank money is available natively on blockchain and when tokenized deposits and MiCAR-compliant euro instruments can operate in the same interoperable environment, market participants will have no reason to rely on a foreign private substitute by default. »

An internal debate that divides European stakeholders

The ECB’s analysis does not, however, achieve consensus on the Old Continent. Joachim Nagel, president of the Bundesbank, stated in February 2026 that euro-denominated stablecoins could serve low-cost cross-border payments and protect the eurozone against dollarization caused by American tokens. A different view from that of the ECB president.

Additionally, a consortium of twelve major European banks, including ING, BBVA, BNP Paribas, Danske Bank and UniCredit, plans to launch a private digital euro before the end of 2026, under the Qivalis structure approved by authorities. Jan-Oliver Sell, CEO of Qivalis, summarized the disagreement directly: « If we do not have a euro on blockchain with sufficient liquidity depth, then the only alternative is the US dollar. This is a real and imminent risk for Europe’s financial and digital sovereignty. »

Perspectives and issues for the coming months

The ECB targets a digital euro launch by 2029. European parliamentarians must adopt the necessary regulation by 2026, and pilot steps could begin by mid-2027. Until then, the stablecoin market will likely continue to grow, driven by institutional adoption and cross-border flows.

The financial stakes are considerable. According to ECB research, every $3.5 billion inflow into dollar-backed stablecoins lowers three-month Treasury bill yields by 2.5 to 3.5 basis points under normal conditions, an effect that can double during periods of US public securities shortages. This financial transmission mechanism shows that stablecoins are not simple technical tools: they reshape capital flows globally and modify monetary power dynamics.

The industry warns against the risk of letting the United States alone define the rules of the game. James Brownlee, CEO of t-0, a platform founded by Tether, stated bluntly: « The United States passed legislation, turned it into law and created a regulatory framework that entrenches dollar stablecoin dominance. The ECB responded with a speech explaining why Europe should not try to compete. Even if the ECB is correct in theory, the market is not waiting for theory to become infrastructure. »

Conclusion

The debate on stablecoins in Europe is reaching enormous proportions. Between the ECB’s caution and the private initiatives of European banks, between the American GENIUS Act model and the vision of a tokenized public infrastructure, the choices made in the coming years will determine Europe’s place in the global digital monetary landscape. What is certain is that the question can no longer be postponed: with $317 billion in stablecoins in circulation and 98% denominated in dollars, the train of digital dollarization has already left the station.

Sources

Telemac
Telemachttp://cryptoinfo.ch

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