EU Watchdog Warns of “Urgent” Stablecoin Threat, Citing Systemic Shock Risk – Why?

The European Union’s top financial risk authority has warned that stablecoins could pose a serious threat to financial stability unless urgent safeguards are ￰3￱ a statement released on October 2, the European Systemic Risk Board (ESRB), chaired by European Central Bank President Christine Lagarde, pointed out vulnerabilities in so-called “third country multi-issuer” stablecoin models and called for immediate policy action. Stablecoins, designed to maintain a steady value by pegging to fiat currencies or government securities, have surged over the past five years into a market worth more than $300 billion, according to DeFiLlama ￰4￱ sector is dominated by dollar-backed tokens, with Tether’s USDT controlling more than 58% of the market.

Euro-backed tokens, by contrast, account for just 0.15% of the global ￰5￱ ESRB, during its 59th General Board meeting on September 25, stressed that interchangeable tokens issued both within and outside the EU contain “built-in vulnerabilities.” Lagarde Pushes Back on Offshore Stablecoin Structures Under MiCA Gaps Under this structure, EU-regulated issuers must hold reserves locally, while non-EU partners manage identical tokens backed ￰6￱ warn that during times of stress, investors could rush to redeem in the EU, overwhelming local reserves and leaving the bloc exposed to offshore ￰7￱ to people familiar with discussions, the ESRB endorsed a recommendation to ban such ￰8￱ non-binding, the move places pressure on EU authorities to either impose restrictions or outline other ￰9￱ its meeting on 25 September, the General Board assessed the main risks to EU financial ￰10￱ the press release ￰0￱ ￰11￱ — European Systemic Risk Board (@ESRBofficial) October 2, 2025 Both the ECB and ESRB declined to comment on the proposal, but Lagarde has repeatedly shown concern that the bloc’s regulatory framework, known as MiCA, leaves gaps in coverage for cross-border ￰12￱ compared the risk to past banking crises, where liquidity mismatches and inadequate reserves destabilized institutions across ￰13￱ argued that unless strong equivalence regimes and safeguards for cross-border transfers are introduced, multi-issuer models should not be permitted to operate in ￰14￱ warnings come as global financial risks remain ￰15￱ ESRB noted that investor optimism has pushed asset valuations to record highs, leaving markets vulnerable to ￰16￱ stress tests show European banks are resilient, weak growth prospects and rising fiscal pressures continue to weigh on ￰17￱ board pointed to ongoing geopolitical tensions and shifting trade policies as additional challenges for Europe’s financial ￰18￱ Face Rising Global Scrutiny as Regulators Warn of Systemic Risks Stablecoins are also under scrutiny ￰19￱ this month, the Bank of England’s Financial Policy Committee warned that poorly managed reserves could trigger fire sales and destabilize broader ￰20￱ committee also flagged the risk of currency substitution, where foreign-denominated stablecoins weaken the use of domestic ￰21￱ October 1, Bank of England Governor Andrew Bailey said systemic stablecoins may gain access to central bank accounts but warned that such tokens could reshape Britain’s financial system by separating money-holding from credit ￰22￱ of England Governor says stablecoins could reduce UK reliance on commercial banks while proposing controversial ownership caps. #UK #Stablecoin ￰1￱ — ￰23￱ (@cryptonews) October 1, 2025 In the United States, regulators have moved in a different ￰24￱ July, Congress passed the GENIUS Act , the first federal law covering stablecoins, which sets capital and reserve requirements for ￰25￱ at Morningstar DBRS project the market could exceed $1 trillion in annual payments by ￰26￱ firm described stablecoins as programmable money, combining fiat stability with blockchain efficiency to deliver faster, cheaper payments compared to systems such as SWIFT or wire transfers.

Still, the rapid expansion of stablecoins has unsettled parts of the ￰27￱ ￰28￱ associations warn that adoption could drain deposits and disrupt ￰29￱ has countered this view by releasing research in August , arguing that fears of deposit flight are overstated and that stablecoins reinforce the global role of the ￰30￱ published a defense against banking claims that stablecoins threaten financial stability, calling the "deposit erosion" narrative a "myth" protecting banks' $187 billion monopoly. #Coinbase #Stablecoin ￰2￱ — ￰31￱ (@cryptonews) September 16, 2025 The exchange noted that banks already hold trillions in reserves at the Federal Reserve, offering little benefit to depositors, while stablecoins provide higher yields and near-instant ￰32￱ European regulators, the debate extends beyond banking ￰33￱ warn that reliance on dollar-based tokens undermines financial sovereignty and weakens the effectiveness of monetary ￰34￱ adviser Jürgen Schaaf has cautioned that the dominance of ￰35￱ such as Tether and Circle leaves Europe dependent on offshore ￰36￱ and Paxos are among the issuers most affected by the EU’s proposed ￰37￱ manage reserves primarily in ￰38￱ and short-term Treasuries, while their EU operations are overseen by regulators in France and ￰39￱ in both countries have so far declined to ￰40￱ ESRB said it will publish a detailed report on stablecoins, crypto-investment products, and multi-function financial groups in the coming ￰41￱ latest risk dashboard shows systemic risks in the EU remain “elevated,” reinforcing why stablecoins are now viewed as a pressing concern.