European Central Bank advisor expresses concerns over the expansion of Dollar-denominated stablecoins, may counter with digital euro

## The Dollar-backed stablecoin that is sweeping the market

Jürgen Scharf, an advisor in the market infrastructure and payments division of the European Central Bank (ECB), warned on the 28th that stablecoins are transforming the landscape of international finance and that without a strategic response, Europe's monetary sovereignty and financial stability could be compromised.

He argues that a major risk for Europe is that US dollar-denominated stablecoins, such as USDT and USDC, are dominating the global market. While US dollar-denominated stablecoins account for 99% of the stablecoin market's total market capitalization of $230 billion (approximately 34 trillion yen), the market capitalization of euro-denominated stablecoins is less than €350 million (approximately 59.9 billion yen), highlighting a significant disparity between the two.

Furthermore, in the United States, the Genius Act, which established a framework for stablecoin regulation, was enacted on July 18. Mr. Scharf pointed out that this law has "more lenient aspects" compared to the EU's comprehensive cryptocurrency regulation, MiCA. As a result, regulations on US Dollar-denominated stablecoins have become more relaxed, and the supply of stablecoins is expected to expand to approximately $2 trillion (about 296 trillion yen), nearly 10 times its current level, by the end of 2028.

Mr. Scharf stated that if the US Dollar-denominated stablecoins become widely used in the Eurozone, their impact could be extensive, potentially weakening the ECB's influence on monetary policy. He views the expansion of US Dollar-denominated stablecoins as a means to enhance the United States' economic and geopolitical dominance, which could lead to increased funding costs in Europe and geopolitical dependency.

Multiple Routes

Mr. Schaaf explained with specific examples the multiple pathways through which dollar-denominated stablecoins could weaken European financial control.

In the payment sector, the introduction of stablecoins is advancing in remittances and e-commerce. Major U.S. card companies Visa and Mastercard have already integrated Dollar-denominated stablecoins into their payment systems. Additionally, major U.S. retailers such as Walmart and Amazon are considering the use of stablecoins, which may pose a risk of migrating large-scale payment flows outside of traditional financial systems.

Moreover, stablecoins that function as payment assets are widely used in decentralized finance (DeFi), cryptocurrency exchanges, tokenized asset markets for transaction settlements, and cross-border payments. New use cases include supporting DVP settlements for institutional investors and interbank transactions, with their speed, global accessibility, and interoperability gaining attention.

Furthermore, there are platforms that offer yields for holding stablecoins. If such stablecoins become popular among companies and consumers seeking yields, there is a possibility of deposits flowing out of European banks, which could threaten their financial intermediation functions and hinder credit provision, Mr. Scharf warned. The impact is particularly significant in Europe, where banks play a central role in the financial system, and if USD-denominated stablecoins become widely used in the Eurozone, it could weaken the ECB's control over the financial environment, he emphasized.

What can be done in Europe

Mr. Schaaf pointed out that, unless a reliable euro alternative is established in token payment infrastructure, Dollar-denominated stablecoins may gain an early advantage. "Such dominance of the Dollar will bring strategic and economic advantages to the United States, allowing it to finance at lower costs while exerting global influence," he stated.

This means that for Europe, compared to the United States, the cost of funding will rise, the freedom of monetary policy will decrease, and geopolitical dependence will increase.

In response to the current situation, the speaker emphasized that Europe does not have the luxury of waiting. He presented several measures as follows.

1. Strengthening support for regulated Euro-denominated stablecoins
2. Collaboration between the ECB's Digital Euro Project and the Private Sector
3. Expansion of the use of Distributed Ledger Technology (DLT) in wholesale financial markets
4. Strengthening International Cooperation on Stablecoin Regulation

Mr. Schaaf positioned the digital euro as a complementary element of a broader digital payment strategy, stating that it is expected to serve as a strong defense of European monetary sovereignty at the point of payment.

In early July, the ECB approved two DLT pilot projects, "Pontes" and "Appia", aimed at enhancing the wholesale payment and cross-border payment infrastructure in Europe, and he believes that this initiative will make a significant contribution to this field.