Stablecoins could siphon off euro zone bank deposits, ECB warns

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FRANKFURT (Reuters) -Stablecoins could draw valuable retail deposits away from euro zone banks and any run on a coin could have widespread stability implications for the global financial system, the European Central Bank warned on Monday.

Stablecoins, digital assets designed to maintain a stable value, have been growing in popularity and their market value now exceeds $280 billion, a relatively small figure but still notable because issuers have been among the largest buyers of U.S. Treasuries.

They are intended as a store of value and to provide cross-border payments, but their real use is in buying crypto assets, the ECB argued in a Financial Stability Review article, adding that about 80% of all trades currently executed globally on centralised crypto trading platforms involve stablecoins.

“Significant growth in stablecoins could cause retail deposit outflows, diminishing an important source of funding for banks and leaving them with more volatile funding overall,” the ECB said.

But the main risk is posed by a possible investor run since the two largest stablecoins rank among the largest holders of U.S. Treasury bills and have asset reserves that are comparable to the top 20 largest money market funds.

“A run on these stablecoins could trigger a fire sale of their reserve assets, which could affect the functioning of U.S. Treasury markets,” the ECB added.

Such runs could also impact the euro zone if a European Union entity and a third-country entity jointly issue a fungible stablecoin, since EU regulations are tighter and investors are more likely to pick it for redemption.

“This could leave EU issuers with insufficient reserve assets under the supervision of EU authorities to fulfil the combined redemption requests made by EU and non-EU token holders, amplifying run risks in the EU,” the ECB added.

(Reporting by Balazs KoranyiEditing by Gareth Jones)