The increasing popularity of stablecoins could lead to a decline in retail deposits for banks in the eurozone and weaken the effectiveness of monetary policy, according to a European Central Bank study.
Digital assets are becoming an increasingly visible part of the financial system. Among them,
stablecoins, i.e. crypto-assets designed to maintain a stable value, usually by being linked to a major
currency such as the U.S. dollar or the euro, have grown rapidly. Unlike volatile crypto-assets such as Bitcoin, stablecoins are often marketed as digital equivalents of bank deposits. Currently, their use is primarily linked to increasing demand for the settlement of tokenised assets, reflecting the growth of crypto-asset trading ecosystems.
While stablecoins promise faster and cheaper payments and greater financial innovation, their broader use as a means of payment or as a store of value raises important questions about financial stability, the role of banks, and the effectiveness of monetary policy. This study examines these issues with a focus on the euro area.
How do stablecoins affect banks?
The first key finding is that growing use of stablecoins can lead people and firms to move money out of traditional bank deposits and into digital assets. Banks rely heavily on deposits as a stable and low-cost source of funding to support lending to households and businesses. When deposits decline, banks may be forced to rely more on wholesale or market-based funding, which is typically more expensive and less stable.
„Our analysis shows that increasing interest in and attention toward stablecoins are associated with a measurable decline in retail bank deposits and a reduction in bank lending to firms. In other words, stablecoins can reduce the amount of credit banks provide to the real economy. Importantly, these effects are nonlinear and depend critically on the scale of stablecoin adoption, their design features, and their regulatory treatment.” – said the authors of the study.
Using evidence from the rapid expansion of stablecoins combined with confidential granular data on euro area banks and their individual borrowers, the authors document three main findings.
First, stablecoin adoption induces a deposit-substitution mechanism, whereby funds shift from retail bank deposits to digital assets. This reallocation increases banks’ reliance on wholesale funding and can ultimately constrain their intermediation capacity.
Second, they show that stablecoins alter the passthrough of policy rates to bank funding costs and lending conditions and potentially weaken the predictability of policy actions.
Third, the authors document a potential risk associated with the growing prevalence of foreign-currency-denominated stablecoins. Their diffusion is likely to increase banks’ reliance on foreign-currency wholesale funding.
The authors concluded: „We show that banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty.”
More details here: Stablecoins and monetary policy transmission – working paper series no.3199
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