Europe Weighs Stablecoin Benefits Against Financial Risks

European policymakers are assessing the benefits of stablecoins against risks to financial stability, consumer protection and monetary control as the European Union applies its Markets in Crypto-Assets Regulation, known as MiCA.

Stablecoins are digital tokens designed to keep a stable value, usually by tracking a fiat currency such as the euro or U.S. dollar. Issuers generally hold cash, bank deposits or other assets to support the token’s value and allow users to exchange it for traditional money.

MiCA rules for asset-referenced tokens and e-money tokens took effect on June 30, 2024. Most remaining provisions began applying on December 30, 2024. The framework requires issuers to obtain authorization, publish information about their tokens and maintain reserves. National regulators can supervise issuers and restrict products that threaten financial stability.

Stablecoins could make payments and transfers faster, including across borders, while reducing costs for businesses and consumers. Euro-denominated tokens could provide a digital payment option linked to the single currency and support financial services based on blockchain networks.

Risks could grow if stablecoins become widely used outside the crypto market. A large number of users seeking to exchange tokens for euros at the same time could put pressure on an issuer’s reserves or on banks holding those reserves. Regulators are examining risks from fraud, cyberattacks, money laundering and the loss of consumer funds if an issuer fails.

The European Central Bank has warned that foreign-currency stablecoins could expand in the EU and reduce the euro’s role in payments. The ECB has raised concerns about the effect of large stablecoin transactions on bank deposits and the transmission of monetary policy.

EU authorities have focused on tokens linked to the U.S. dollar, which account for most stablecoin activity. MiCA limits the distribution of some widely used foreign-currency tokens when they reach thresholds for payment use in the EU.

Banks and payment companies are assessing the market. Regulated stablecoins could allow financial institutions to settle transactions on blockchain networks. Competition from technology companies and crypto firms could put pressure on existing payment systems.

The European Commission, the ECB and national regulators are continuing to develop rules for issuers, reserve assets and supervision. The EU is also developing a digital euro, a central-bank digital currency that would be issued by the Eurosystem rather than private companies. It could operate alongside private stablecoins, which would have different issuers, safeguards and legal structures.