The market capitalization of stablecoins has surged over the past two years, capturing the attention of regulators and banks alike. This growth raises questions about financial stability and the potential impact on the European banking sector, particularly as multiple regulatory changes are expected in 2027. The EU is reviewing its Markets in Crypto-Assets Regulation (MiCAR), which could influence the estimated impact of stablecoins on banks. Meanwhile, discussions in the US could lead to stablecoin issuers being allowed to directly distribute rewards, a first of its kind.
Stablecoins are crypto assets issued by private institutions, backed by reserves of cash or liquid assets, and pegged to a given currency or commodity. The total market capitalization of stablecoins has surpassed $300 billion globally, with 99% consisting of USD-pegged tokens. Despite their rapid growth, stablecoins still represent a small fraction compared to bank deposits, but their potential efficiency gains and risks have drawn significant interest.
The widespread adoption of euro-denominated stablecoins in Europe could have mixed implications for banks. If users acquire stablecoins by redeeming liquid investments, the impact on financial institutions may be limited. However, if EU citizens and corporates adopt stablecoins using bank deposits, banks could face a net drop in retail and corporate deposits, leading to a shift in their funding base. Under MiCAR, stablecoin issuers are required to hold part of their reserves as deposits with European commercial banks, which could mitigate some of the funding challenges.
This shift from retail to wholesale deposits is not without consequences. Wholesale deposits are more volatile and represent a less stable funding source for banks. Additionally, capital requirements are higher for wholesale deposits, making them more expensive to hold. The ease with which deposits can be switched into stablecoins could increase banks' exposure to economic cycles, making funding management more complex and costly.