America's "financial weapon"? ECB: The rise of dollar stablecoins will weaken the control of European monetary policy

The European Central Bank warns that the dollar-dominated digital currency system poses a strategic challenge to European monetary sovereignty. Without strategic countermeasures, European financial stability and monetary autonomy may be eroded.

On July 28, Jurgen Schaaf, an advisor in the ECB's Market Infrastructure and Payments Department, published an article stating that if dollar stablecoins are widely used in the Eurozone, the ECB's control over monetary policy may be weakened.

Dollar stablecoins dominate the global market, accounting for approximately 99% of the total market value of stablecoins. In contrast, euro stablecoins remain marginal, with a market value of less than 350 million euros.

(Dollar stablecoins dominate the global market)

With the GENIUS Act signed by Trump likely to take effect in a few weeks, the supply of stablecoins is expected to grow from $230 billion in 2025 to $2 trillion by the end of 2028. Schaaf warns that this trend, combined with political support for stablecoins in the U.S., will further tilt the balance in favor of the U.S., potentially lowering borrowing costs in the Eurozone while increasing its financing costs.

Previously, ECB officials had warned that stablecoins could pose financial stability risks. If a mainstream stablecoin were to suddenly collapse, the shock could spread throughout the financial system. According to the Bank for International Settlements in its "2025 Annual Economic Report," many stablecoins have previously experienced "serious deviations" from their pegged exchange rates.

Potential Impact on European Monetary Sovereignty

If dollar stablecoins are widely used for payments, savings, or settlements in the Eurozone, the ECB's control over monetary conditions may be weakened.

The use of stablecoins is rapidly expanding. Initially used for cryptocurrency trading and cross-border remittances, they are now being adopted by mainstream payment and commercial giants.

Major U.S. card organizations like Visa and Mastercard have begun integrating stablecoins into their global products, while retailers like Walmart and Amazon are also exploring the use of stablecoins, which could lead to a significant number of transactions bypassing traditional banking systems.

Schaaf points out that some platforms even offer interest on stablecoin holdings, making their function similar to money market funds, which could divert bank deposits and pose a greater threat to the bank-centered European financial system.

This erosion, although gradual, could replicate patterns observed in some "dollarized" economies, especially when users seek security or yield advantages that euro-denominated instruments cannot provide.

Once this dynamic takes hold, it will be difficult to reverse, given the "network effects" and economies of scale associated with stablecoins. In the realm of tokenized settlements, reliable digital cash equivalents are crucial; without credible euro alternatives, dollar stablecoins may solidify their first-mover advantage.

Analysts believe that this dominance of the dollar will provide the U.S. with strategic and economic advantages, allowing it to finance its debt at lower costs while exerting global influence. For Europe, this means higher financing costs relative to the U.S., diminished monetary policy autonomy, and geopolitical dependence. **

Europe's Response Strategy Choices

In the face of this situation, Schnabel stated that the European Central Bank (ECB) clearly has no room for complacency, but there are still various options in the ECB's policy toolbox.

First, policymakers can provide more support for appropriately regulated euro-denominated stablecoins. If designed properly and able to effectively mitigate risks, high-quality euro stablecoins can meet legitimate market demand and help enhance the international role of the euro.

Second, the digital euro project of the European Central Bank system and innovations from the private sector should be seen as complementary elements in a broader European digital payment strategy. Particularly at the payment interaction end, the digital euro is expected to become a strong line of defense for safeguarding European monetary sovereignty.

Third, strengthening the application of distributed ledger technology (DLT) in financial markets is crucial. The recent short-term and long-term initiatives announced by the European Central Bank system—Pontes and Appia projects—are key contributions in this area, aimed at improving the efficiency of cross-border payments and settlement capabilities.

Finally, global coordination in the regulation of stablecoins is essential. Without consistent rules, the current fragmented landscape may persist, exacerbating financial instability, regulatory arbitrage, and the dominance of the dollar globally.

In summary, stablecoins are no longer a niche phenomenon but an indispensable part of digital finance. Europe's stable institutional framework and rules-based approach provide a foundation of trust, and if this advantage can be leveraged through robust regulation, infrastructure investment, and digital currency innovation, the euro may become stronger in this transformation