Cryptocurrency adoption growth observed by European Central Bank, sparks concern about financial stability
The European Central Bank (ECB) has recently expressed concerns about the growing integration of cryptocurrencies, particularly stablecoins, into the European financial system. In a report, the ECB highlighted several potential risks that could arise from this integration.
Firstly, the ECB fears that stablecoins could destabilize the European banking system by siphoning deposits away from traditional banks, undermining their role as financial intermediaries and jeopardizing credit availability in the Eurozone. In a worst-case scenario, the potential collapse of a major stablecoin issuer under market stress could trigger a fire sale of Treasury bills and commercial paper, decreasing prices of traditionally safe assets and causing losses for banks and money market funds holding them. This sequence can produce a widespread contagion effect within the financial system.
Secondly, the growing footprint of stablecoins, especially US dollar-denominated ones used in Europe, could weaken the ECB’s control over monetary conditions, risking a form of monetary sovereignty erosion similar to dollarization seen in some economies. The rapid projected increase in the stablecoin market cap—from $230 billion in 2025 to $2 trillion by 2028—combined with comparatively lenient regulatory frameworks (e.g., the US GENIUS Act versus the EU’s Markets in Crypto-assets Regulation) could accelerate adoption without adequate safeguards, intensifying these risks.
Thirdly, stablecoins' integration with major payment schemes and merchants risks shifting large transaction volumes outside traditional financial systems, potentially reducing transparency and regulatory effectiveness.
The ECB's concerns about potential contagion from cryptocurrencies to TradFi are heightened due to the growing interconnectedness between the two markets. The ECB's survey in November 2024 revealed that 9.7% of European households owned some cryptocurrencies, with significant regional variations. For instance, 21% of Portuguese households own cryptocurrencies, compared to 6% for France.
The ECB reported that bank cryptocurrency custody grew from €400 million in 2023 to €4.7 billion in 2024, but this figure does not include the UK and Switzerland. There is a discrepancy between the ECB's and Basel Committee's custody figures, with the Basel Committee reporting €7.3 billion for June 2024.
The ECB considers the volume of crypto-asset investment products as an avenue for greater interconnectedness between cryptocurrencies and TradFi. The ECB's latest financial stability report also highlights the potential for stablecoin deposits to grow in the future.
However, the ECB's methodology may inflate its figures because some respondents reply affirmatively even though they personally are not crypto holders. The majority of these households held less than €1,000 worth of cryptocurrencies, with 91% investing less than €20,000.
The ECB has noted significant growth in various aspects of cryptocurrency involvement by traditional financial institutions. One of the ECB's biggest concerns is a lack of visibility into the activities of non-bank financial institutions, which it considers as creating a blind spot for potential contagion.
In conclusion, the ECB's concerns about cryptocurrencies focus primarily on stablecoins' potential to disrupt banking intermediation, undermine monetary policy control, create liquidity and asset valuation spirals during crises, and propagate financial instability via contagion to traditional finance. The ECB is urging for stricter regulations and increased transparency to mitigate these risks.
- The integration of stablecoins into the European financial system could lead to a shift in transaction volumes outside traditional financial systems, potentially reducing transparency and regulatory effectiveness in the banking industry.
- The rapid growth of the stablecoin market cap could weaken the European Central Bank’s control over monetary conditions, risking a form of monetary sovereignty erosion similar to dollarization in some economies.
- The European Central Bank has noted significant growth in various aspects of cryptocurrency involvement by traditional financial institutions, particularly in the area of bank cryptocurrency custody, which could increase interconnectedness between cryptocurrencies and traditional finance.
- The ECB is urging for stricter regulations and increased transparency in the banking sector, especially in the activities of non-bank financial institutions, to mitigate the risks associated with the potential disruption caused by stablecoins and cryptocurrencies.
