Stablecoin Market Grows 1000% to $250 Billion Amid Regulatory Concerns

The stablecoin market has seen significant growth, with around $250 billion of these tokens currently in circulation. Analysts predict that the market could grow tenfold within years. Stablecoins aim to maintain the same value as a country’s currency, most often the US dollar, and are backed by liquid assets kept in reserve. US Treasury Secretary Scott Bessent recently stated that the total value of stablecoins could reach $2 trillion globally, potentially reinforcing US dollar supremacy. US lawmakers are close to passing the Genius Act, the first set of rules to oversee the market.

However, central banks have expressed concerns about the potential risks associated with stablecoins. The European Central Bank (ECB) has warned that stablecoins pose risks for monetary policy and financial stability, especially when they operate across international borders. ECB president Christine Lagarde cautioned that stablecoins must be governed by sound rules to mitigate these risks. The ECB has argued that if coins issued abroad are treated as identical to those issued within the EU, a rush of redemptions could put pressure on banks in the EU. Under current EU rules, stablecoins created inside the bloc must hold most of their reserves at an EU bank and let holders redeem tokens for cash directly. The ECB fears that treating non-EU coins the same could increase the risk of a run on reserves and put pressure on other banks.

Lagarde warned lawmakers that if redemptions are amplified by large developments and possible difficulties in any stablecoins, the European safeguards, backups, and deposits will be exposed. The Bank for International Settlements also noted that stablecoins perform badly on key tests for use as money, as they are not backed by a central bank, lack enough guardrails to prevent illicit activity, and do not have the funding flexibility of banks that lend money.

Inside the EU, there has been a clash between the commission and the ECB regarding the risks and oversight of stablecoins. The commission pushed back on the bank’s warnings, stating that a run on a well-run, backed stablecoin was very unlikely. A commission spokesperson said that if one did occur, foreign holders would redeem their tokens in the US, where the majority of the tokens circulate and the majority of the reserves are held. A cryptocurrency executive suggested that the ECB’s warnings partly reflect fears that a stablecoin operator’s reserves might sit in a country with a small banking system. The executive also noted that the ECB wants to push its own central bank digital currency to compete with private stablecoins.

To add safeguards, ECB officials proposed asking other countries for legal guarantees that they could transfer stablecoin reserves to the EU in a crisis. They noted there are no current agreements between the EU and other nations on matching regulatory standards. A commission official said at a closed-door meeting that guarantees were unnecessary, prompting an ECB attendee to ask, “Do we need to trust them blindly that they will transfer the assets in case of a run on EU reserves?” Instead, the commission proposed that national supervisors make their own risk assessments and demand extra safeguards when needed. Andrea Resti, a professor of financial risk management at Bocconi University in Milan, warned that this approach could lead to uneven oversight, as European supervisors issue authorizations in very tight timelines and without enough due diligence.