Growth in stablecoins needs 'close monitoring': ECB

FRANKFURT

A boom in stablecoins — cryptocurrencies designed to hold a steady value by being pegged to traditional assets — calls for "close monitoring", ECB economists warned.

Though current risks from stablecoins were "limited", the economists said, their "rapid growth" meant regulators had to be alert to potential dangers.

"Stablecoins are growing rapidly and they may find adoption across new use cases, which could introduce financial stability risks in the future," they wrote in an ECB blog post.

Backed by conventional assets such as cash or U.S. government bonds, stablecoins are supposed to keep a fixed value — meaning they can be used reliably for buying, selling and cash transfers all while bypassing banks.

They now account for about eight percent of all crypto-assets and have a market value of $280 billion (243 billion euros), the economists said, and some project there could be $2 trillion worth in circulation by 2028.

"If stablecoins are adopted widely, households may replace some of their bank deposits with stablecoin holdings," the economists said, with deposit outflows potentially "diminishing an important source of funding for banks and leaving them with more volatile funding overall".

Stablecoins' links to traditional financial markets — stablecoin provider Tether is among the world's largest purchasers of short-term U.S. government debt — moreover meant there were contagion risks, the economists warned.

A sudden loss of faith in a stablecoins could see them cashed in all at once, prompting a "fire sale" of their reserve assets that "could affect the functioning of U.S. Treasury markets", they wrote.

"This could pose a significant risk if stablecoins, and their corresponding asset reserves, continue to grow rapidly," they said.