ECB chief warns EU stablecoin regulations weaken Europe

• Christine Lagarde warns about liquidity risks in stablecoins
• Loopholes in MiCA could overburden EU issuers
• ECB calls for stronger legislation for financial stability

European Central Bank (ECB) President Christine Lagarde stated that the European Union's current regulations surrounding stablecoins could leave the region vulnerable. Speaking at the European Systemic Risk Board (ESRB) conference on September 3, Lagarde highlighted that these digital assets, while innovative, bring back risks already known to the traditional financial system.

"The risk categories they create are not new. These are risks that supervisors and regulators have long recognized," Lagarde said. Among the main concerns, she highlighted liquidity, as issuers promise immediate redemptions at par while investing resources in assets that may not be sufficiently liquid to support mass withdrawals.

The director also highlighted gaps in the Markets in Cryptoassets (MiCA) regulation, which allows for multi-issuance schemes. Under this model, an entity located outside the EU could jointly issue stablecoins with a European entity. However, only the EU-based party would be subject to local requirements.

This imbalance, according to Lagarde, could lead to disproportionate pressure on EU issuers if simultaneous redemptions occur, compromising their ability to honor their commitments. The risk is similar to that of international banking groups, which are already subject to stricter liquidity standards, such as the net stable funding ratio, which does not yet exist for stablecoins.

The ECB president warned that without additional safeguards, Europe could become the weakest link in the global flow of these assets. To mitigate this threat, she urged European lawmakers to restrict transactions that lack robust equivalence regimes in other jurisdictions, as well as to establish clear guarantees for transfers between issuers within and outside the region.

"We need to take concrete action now. European legislation must ensure that such schemes cannot operate in the EU unless they are supported by robust equivalence regimes in other jurisdictions and by safeguards regarding the transfer of assets between EU and non-EU entities."

Lagarde declared.

She also reinforced the importance of international coordination, warning that without global standards, risks could simply migrate to regions with weaker regulations, compromising the financial stability of the European bloc.