ECB President: EUR Stablecoin Case “Weaker than it Appears”

European Central Bank President Christine Lagarde has poured cold water on efforts to introduce euro stablecoins, arguing that the products, which “were initially designed to solve a narrow problem within the crypto ecosystem” need to have their two current functions – monetary and technological – separated, to overcome what is a “far weaker” argument for their deployment.

In a speech, Lagarde charts a different path for Europe than that in the US, where, she noted, the Genius Act includes the provision that stablecoins ensure the continued dominance of the US dollar. While this surge in dollar stablecoins has raised voices that Europe needs its own coins to remain relevant and avoid a loss of monetary sovereignty, Lagarde instead asked what she termed “a more fundamental question”…”do we actually need stablecoins to obtain the benefits they are said to provide? Or are we mistaking the instrument for the outcome, when what matters is the architecture underpinning which other instruments can safely emerge?”

Pointedly noting that Stablecoins creators anchored them to fiat money – “the very system they had originally sought to bypass” – Lagarde then observed that as they have moved beyond the crypto ecosystem, two functions have emerged. The first is monetary, where stablecoins are increasingly seen as a way to extend the global reach of reserve currencies; the second is technological, where they are seen as changing how real-world assets can be settled, via tokenisation.

“Taken together, these developments reveal a technology that is doing two distinct things at once – reshaping monetary demand and transforming settlement infrastructure – in ways that blur the boundary between them,” Lagarde said. “That blurring is precisely what makes the current policy debate so difficult to navigate. And it is where Europe risks going wrong.”

In explanation, Lagarde took the two functions separately, noting that the monetary case for stablecoins raises two material trade-offs. The first is the confidence factor, in which she highlighted events around the collapse of Silicon Valley Bank and its impact on Circle’s USD Coin, which had $3.3 billion in reserves there. “At scale, such dynamics can transmit stress to the underlying asset markets,” she warned. “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.”

Lagarde also highlighted the risk of feedback loops between redemptions and asset markets, particularly where issuers are non-banks. “Multi-issuer schemes add a further layer of vulnerability,” she observed.

The second material impact noted by Lagarde is based on ECB research, which she said has found that in the euro area, where banks remain the dominant source of credit to the real economy, large-scale deposit substitution would weaken lending to firms and the transmission of monetary policy. “Taken together, these trade-offs are significant. They outweigh the short-term gains in financing conditions and international reach that euro-denominated stablecoins might provide,” Lagarde stated. “If we want to strengthen the international appeal of the euro, stablecoins are not an efficient way of doing so. The best solution remains the same: more integrated capital markets through the savings and investments union, and over time a safe asset base that matches the scale of our ambitions for the euro’s international role.”

The ECB president was a lot more positive on the technology benefits of stablecoins, which she described as “genuinely transformative”, especially for Europe, with its fragmented financial infrastructure. She also accepted that this was where the EU had to prepare properly if it was not to “entrench dollar dependency at the level of settlement infrastructure itself”.

That said, Lagarde also observed that stablecoins have two structural weaknesses as a foundation for settlement. The first is fragility, “A key benefit of tokenised financial markets is atomic settlement, but that guarantee is only as strong as the instrument that serves as cash within the system. As stablecoins can break away from their peg during times of stress, they do not confer the unconditional finality that central bank money does.”

The second is fragmentation, “The promise of tokenised finance is a single, interoperable environment, but if settlement relies on stablecoins, that environment fragments across however many competing instruments the market produces,” she said. “Consequently, we end up with multiple platforms and no common anchor for convertibility.”

Highlighting the work the Eurosystem is doing to renew the financial infrastructure with central bank money at its heart, Lagarde concluded, “Our task is not to replicate instruments developed elsewhere, but to build the foundations and the infrastructure that serve our own objectives, so that we can harness the benefits of innovation without importing the fragilities.”