EU Watchdog Warns of “Urgent” Stablecoin Threat, Citing Systemic Shock Risk
The European Systemic Risk Board (ESRB) has issued a warning that stablecoins could pose a significant threat to financial stability, emphasizing the need for urgent protective measures. In a declaration published on October 2, the ESRB highlighted security gaps in “Thirdland Multi-Issuer” StableCoin models, calling for immediate political action to address these vulnerabilities.
Stablecoins, designed to maintain a constant value pegged to fiat currencies or state securities, have grown into a market worth over $300 billion in the past five years, according to data from Defillama. The sector is dominated by dollar-backed tokens, with Tether’s USDT controlling more than 58% of the market. However, the ESRB has expressed concerns about the potential risks associated with these tokens, particularly in the context of cross-border transactions.
Lagarde Presses Back on Offshore Stablecoin Structures Under MICA Gaps
European Central Bank President Christine Lagarde has expressed concerns about the regulatory framework for stablecoins, citing gaps in the EU’s Markets in Crypto-Assets (MICA) regulation. According to Lagarde, these gaps could lead to systemic risks, particularly in the context of cross-border transactions. The ESRB has advocated for a recommendation to prohibit certain stablecoin models, which could have a significant impact on the market.
The ESRB’s warnings come as global financial risks remain elevated. The board has pointed to ongoing geopolitical tensions and shifts in trade policy as additional challenges for the financial prospects of Europe. While stress tests show that European banks are resilient, weak growth prospects and increasing fiscal pressure continue to burden stability.
Stablecoins Face Rising Global Scrutiny as Regulators Warn of Systemic Risks
Stablecoins are also under scrutiny elsewhere, with regulators warning of systemic risks associated with these tokens. The Bank of England’s Financial Policy Committee has warned that poorly managed reserves could trigger fire sales and destabilize wider markets. In the United States, the Congress has passed the Genius Act, the first federal law to cover stablecoins, which includes capital and reserve requirements for issuers.
Analysts at MorningStar DBRS project that the stablecoin market could exceed annual payments of $1 trillion by 2030. While some argue that stablecoins could strengthen the global role of the dollar, others warn that adoption could empty deposits and disrupt lending. The debate highlights the need for clear regulation and oversight of the stablecoin market to mitigate potential risks and ensure financial stability.
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