By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Monday warned that the rapid growth of stablecoins could pose risks to financial stability, affect the transmission of monetary policy and further entrench the global dominance of the U.S. dollar, arguing that central banks must respond through regulation and continued innovation in public money.

In a speech at the Bank of Korea’s conference on the future of money in Seoul, Schnabel compared the emergence of stablecoins with the rise of money market funds in previous decades, saying that private monetary innovation could bring efficiency gains but also reshape the financial system in ways that central banks could not ignore.

“Central banks and regulators need to be ready to adapt regulation, monetary policy implementation and payment infrastructure in an agile manner to safeguard financial stability, preserve monetary control and anchor their currency’s role in the digital age,” she said.

Schnabel noted that global stablecoin capitalization had risen to nearly $300 billion, though euro-denominated stablecoins remained marginal, with a combined capitalization of only around €500 million.

While stablecoins are often promoted as payment instruments offering near-instant settlement and global accessibility, their current use remains overwhelmingly concentrated in crypto markets, she said.

According to Schnabel, stablecoins share important characteristics with money market funds, including investment in portfolios of relatively safe short-term assets and redemption at or near par value, but they also create vulnerabilities familiar from earlier episodes of financial innovation.

One concern is bank disintermediation.

“If households and firms replace bank deposits with stablecoins, banks are likely to face a less stable deposit base as retail deposits are replaced by wholesale deposits,” she said.

That shift would make bank funding more concentrated, more rate-sensitive and more volatile, she argued.

Schnabel also highlighted the risk of runs on stablecoins themselves, drawing parallels with the instability experienced by money market funds during periods of market stress.

“[W]ith the size of the largest US dollar-pegged stablecoins now approaching that of the largest US money market funds, their impact on financial markets could be significant,” she said.

Reserve composition would be critical in determining how such stress events unfolded, she argued.

Tether’s holdings of commodities, loans and crypto-assets could leave it vulnerable to a loss of confidence in reserve quality, while stablecoins backed mainly by sovereign debt and repos could transmit stress to government-bond and broader fixed-income markets through forced asset sales, she said.

Schnabel also pointed to potential contagion channels between stablecoins and banks.

Under the European Union’s Markets in Crypto-Assets Regulation, stablecoin issuers must hold a significant share of reserves as bank deposits, a requirement that improves liquidity but can create links between stablecoins and the banking sector, she said.

A run on a stablecoin could therefore trigger sudden withdrawals from banks, while bank distress could simultaneously undermine confidence in stablecoins whose reserves are deposited there.

Turning to monetary policy, Schnabel said widespread stablecoin adoption could alter the structure of financial intermediation and the way policy decisions affect the economy.

A greater reliance on wholesale funding would tend to make bank funding costs more responsive to policy-rate changes and could strengthen transmission, she said. At the same time, research suggested that stablecoins behaved differently from money market funds because higher interest rates increased the opportunity cost of holding unremunerated stablecoins.

“[U]nlike money market funds, stablecoins tend to experience outflows following contractionary U.S. monetary policy shocks,” she said.

The overall effect on monetary transmission remained uncertain and would depend on how households and firms used stablecoins, she said.

Schnabel devoted particular attention to international monetary implications, arguing that the near-total dominance of dollar-denominated stablecoins could reinforce the dollar’s global role.

“Today, virtually all stablecoins in circulation are denominated in dollars, with other currencies playing a negligible role,” she said.

Large-scale adoption of dollar-backed stablecoins could amplify the international spillovers of U.S. monetary policy and, in countries with weaker monetary credibility, contribute to currency substitution and a loss of monetary sovereignty, she argued.

Even for Europe, persistent dollar dominance in stablecoins could eventually limit the euro’s role in tokenized finance and the international monetary system, she said.

Rather than resisting innovation, central banks should ensure that it develops within a framework that preserves stability and trust, Schnabel argued.

She reiterated the ECB’s strategy of preserving the role of public money through both the digital euro and tokenized central-bank money for wholesale use.

A digital euro would preserve access to public money, strengthen European strategic autonomy and reduce fragmentation in payments, she said.

“In a world with increasing geopolitical tensions, the introduction of the digital euro is an indispensable step to maintain European sovereignty and foster European integration,” she said.

At the wholesale level, the Eurosystem’s Pontes and Appia projects aim to support settlement in central bank money in a more tokenized financial system, she said.

Pontes would enable distributed-ledger-technology-based transactions to be settled in central bank money by providing a bridge between DLT platforms and the Eurosystem’s TARGET services, Schnabel said.

Appia, meanwhile, was intended to provide a broader vision for an innovative and integrated European financial ecosystem, including tokenized central bank money, monetary policy implementation and collateral management on DLT, tokenized traditional assets, interoperability and cross-border aspects, she said.

“The broader aim is to provide a framework in which private innovation can thrive,” she said.

This would help ensure “that the euro remains a safe and attractive means of payment domestically while also fostering its international role,” she said.

“It remains to be seen whether, in such an environment, stablecoins can find their place in the financial system just as money market funds did 50 years ago, or whether other innovations, like tokenized deposits, will prove to be the more promising alternative,” she said.