ECB warns stablecoins could pull deposits and cut lending

The European Central Bank released a working paper Tuesday titled “Stablecoins and Monetary Policy Transmission” that links growing stablecoin adoption to a measurable decline in retail deposits and a fall in bank lending to the real economy.

ECB staff describe a deposit-substitution effect in which households and companies move funds from bank deposits into stablecoins, reducing the stable, low-cost funding banks use to extend loans. The paper states: “Our analysis shows that rising interest in stablecoins is linked to a measurable decline in retail bank deposits and a reduction in lending to firms.”

When deposits shrink, banks may rely more on wholesale or market-based funding. The authors write that such funding is typically more expensive and less stable, and that changes in banks’ funding mixes can alter how policy interest rates transmit into bank funding costs and lending decisions. “When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable,” the paper adds.

The report says effects vary with the scale of adoption, stablecoin design and regulatory treatment. The authors note nonlinearity in the impacts and warn that adoption can interfere with several monetary policy transmission channels: “We find that stablecoin adoption interferes with multiple monetary policy transmission channels, potentially weakening the predictability of policy actions.”

The paper cites market data showing the stablecoin market has more than doubled over three years to about $312 billion, with roughly $301 billion in U.S.-dollar–pegged tokens, representing about 97% of total stablecoin market capitalization at the time of writing. The paper projects the market could reach $2 trillion by 2028.

The ECB highlighted risks from foreign-currency stablecoins, saying a market dominated by non-euro tokens could further loosen the link between euro-area monetary policy and bank lending. The authors list stablecoin features such as backing assets, redemption mechanisms and links to payment systems as factors that will shape how pronounced the effects become.

The working paper is part of the ECB’s broader monitoring of crypto-assets and payment innovations. The report does not prescribe specific policy measures but calls for close monitoring and coordinated regulation to address risks to bank funding and the transmission of monetary policy.