Stablecoin use could weaken ECB's hand, hamper lenders, ECB paper finds

ECB Study: Eurozone Stablecoin Use May Weaken Banks and Monetary Policy

ECB Report Highlights Risks of Stablecoin Adoption in the Eurozone

Stablecoins and Their Potential Impact

FRANKFURT, March 3 (Reuters) - The spread of stablecoins in the euro zone could weaken the effectiveness of monetary policy, siphon deposits away from banks and reduce lending to the real economy, a study published by the European Central Bank showed on Tuesday.

Stablecoins, crypto assets designed to maintain a stable value, remain niche but their rapid growth has raised concerns that regulation is not keeping pace with a product that could reshape commercial and central banking.

Implications for Traditional Lenders

For traditional lenders, the key issue is that the growing use of stablecoins may lead customers to move money out of bank deposits, forcing lenders to obtain more expensive funding in the market.

"In other words, stablecoins can reduce the amount of credit banks provide to the real economy," the paper, written by ECB economists, said.

Current Market Size and Immediate Risks

However, euro area bank deposits still total about 17 trillion euros ($19.7 trillion) while the global stablecoin market is roughly $300 billion, suggesting that banks are not yet facing any sizable deposit hit.

Monetary Policy Concerns

For the ECB, a key problem is that most stablecoins are issued in dollars, a currency it does not control.

If dollar-based assets gain wider use in Europe, policy moves outside the bloc could affect liquidity and spending conditions, diluting the ECB's influence.

"Foreign monetary conditions could be 'imported' into the euro area through stablecoins," the paper said, adding that that would weaken the central bank's control over financial conditions, among other things, especially during periods of financial stress.

Transmission of Policy and Economic Stability

A hit to banks would also weaken the ECB, as the euro zone economy relies on lenders to transmit interest rate changes to the real economy, the economists said, adding that would make the impact of policy moves less predictable.

Regulatory Recommendations

These risks call for meaningful regulation of stablecoins, such as stronger transparency requirements for stablecoin reserves, robust redemption guarantees, adequate capital buffer to absorb losses and effective oversight can reduce financial risks, it said.

($1 = 0.8627 euros)

(Reporting by Balazs Koranyi; Editing by Nivedita Bhattacharjee)