The European Central Bank said a rise in fixed interest rates could pull money from bank deposits and weaken the way monetary policy flows, according to a new ECB working paper published on Tuesday.
The growing adoption of stablecoins, which are digital assets often pegged to the US dollar or euro, is expected to shift funds away from traditional bank deposits, the ECB said in its latest series of working papers, “Stablecoins and the Transmission of Monetary Policy,” published on Tuesday.
“Our analysis shows that the increased interest in stablecoins is linked to a measurable reduction in retail bank deposits and a reduction in corporate lending,” the report says, noting that stablecoins can reduce bank lending to the real economy.
The ECB noted that the effects are non-linear and vary depending on the scale of stablecoin adoption, their design features and how they are regulated.
The report is part of the ECB’s ongoing efforts to monitor stablecoins, whose market capitalization has more than doubled in the past three years to $312 billion and is projected to reach $2 trillion by 2028.
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In assessing the impact of increased stablecoin adoption on banks, the ECB noted the deposit-shifting effect, where households and companies move funds from retail bank deposits to digital assets.
“Banks are increasingly relying on deposits as a stable and low-cost source of funding to support lending to households and businesses,” the study said.
“When deposits decline, banks may be forced to rely more on wholesale or market funding, which is typically more expensive and less stable,” he added.
The report also suggests that stablecoins may change how policy interest rates affect bank funding and lending costs, with impacts varying by scale of adoption, design and regulation.
“We find that the adoption of stablecoins disrupts several channels of monetary policy transmission and potentially weakens the predictability of policy actions,” the ECB said.
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The central bank warned that foreign currency stablecoins could further weaken the link between domestic monetary policy and bank lending, with risks increasing when non-euro tokens dominate the market.
The study reiterated that USD-backed stablecoins make up the majority of the stablecoin market. Data from CoinGecko shows that these tokens are worth $301 billion in dollars, representing 97% of the total stable market capitalization at the time of publication.
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