The European Union’s top financial risk authority has warned that stablecoins could pose a serious threat to financial stability unless urgent safeguards are introduced. In a statement released on October 2, the European Systemic Risk Board (ESRB), chaired by European Central Bank President Christine Lagarde, pointed out vulnerabilities in so-called “third country multi-issuer” stablecoin models and called for immediate policy action. Stablecoins, designed to maintain a steady value by pegging to fiat currencies or government securities, have surged over the past five years into a market worth more than $300 billion, according to DeFiLlama data. The sector is dominated by dollar-backed tokens, with Tether’s USDT controlling more than 58% of the market. Euro-backed tokens, by contrast, account for just 0.15% of the global total. The ESRB, during its 59th General Board meeting on September 25, stressed that interchangeable tokens issued both within and outside the EU contain “built-in vulnerabilities.” Lagarde Pushes Back on Offshore Stablecoin Structures Under MiCA Gaps Under this structure, EU-regulated issuers must hold reserves locally, while non-EU partners manage identical tokens backed abroad. Regulators warn that during times of stress, investors could rush to redeem in the EU, overwhelming local reserves and leaving the bloc exposed to offshore liabilities. According to people familiar with discussions, the ESRB endorsed a recommendation to ban such models. Though non-binding, the move places pressure on EU authorities to either impose restrictions or outline other protections. Both the ECB and ESRB declined to comment on the proposal, but Lagarde has repeatedly shown concern that the bloc’s regulatory framework, known as MiCA, leaves gaps in coverage for cross-border schemes. Lagarde compared the risk to past banking crises, where liquidity mismatches and inadequate reserves destabilized institutions across borders. She argued that unless strong equivalence regimes and safeguards for cross-border transfers are introduced, multi-issuer models should not be permitted to operate in Europe. The warnings come as global financial risks remain elevated. The ESRB noted that investor optimism has pushed asset valuations to record highs, leaving markets vulnerable to reversals. While stress tests show European banks are resilient, weak growth prospects and rising fiscal pressures continue to weigh on stability. The board pointed to ongoing geopolitical tensions and shifting trade policies as additional challenges for Europe’s financial outlook. Stablecoins Face Rising Global Scrutiny as Regulators Warn of Systemic Risks Stablecoins are also under scrutiny elsewhere. Earlier this month, the Bank of England’s Financial Policy Committee warned that poorly managed reserves could trigger fire sales and destabilize broader markets. The committee also flagged the risk of currency substitution, where foreign-denominated stablecoins weaken the use of domestic money. On October 1, Bank of England Governor Andrew Bailey said systemic stablecoins may gain access to central bank accounts but warned that such tokens could reshape Britain’s financial system by separating money-holding from credit provision. In the United States, regulators have moved in a different direction. In July, Congress passed the GENIUS Act, the first federal law covering stablecoins, which sets capital and reserve requirements for issuers. Analysts at Morningstar DBRS project the market could exceed $1 trillion in annual payments by 2030. The firm described stablecoins as programmable money, combining fiat stability with blockchain efficiency to deliver faster, cheaper payments compared to systems such as SWIFT or wire transfers. Still, the rapid expansion of stablecoins has unsettled parts of the U.S. banking sector. Trade associations warn that adoption could drain deposits and disrupt lending. Coinbase has countered this view by releasing research in August, arguing that fears of deposit flight are overstated and that stablecoins reinforce the global role of the dollar. The exchange noted that banks already hold trillions in reserves at the Federal Reserve, offering little benefit to depositors, while stablecoins provide higher yields and near-instant settlement. For European regulators, the debate extends beyond banking competition. Officials warn that reliance on dollar-based tokens undermines financial sovereignty and weakens the effectiveness of monetary policy. ECB adviser Jürgen Schaaf has cautioned that the dominance of U.S. issuers such as Tether and Circle leaves Europe dependent on offshore structures. Circle and Paxos are among the issuers most affected by the EU’s proposed restrictions. Both manage reserves primarily in U.S. dollars and short-term Treasuries, while their EU operations are overseen by regulators in France and Finland. Authorities in both countries have so far declined to comment. The ESRB said it will publish a detailed report on stablecoins, crypto-investment products, and multi-function financial groups in the coming weeks. Its latest risk dashboard shows systemic risks in the EU remain “elevated,” reinforcing why stablecoins are now viewed as a pressing concernThe European Union’s top financial risk authority has warned that stablecoins could pose a serious threat to financial stability unless urgent safeguards are introduced. In a statement released on October 2, the European Systemic Risk Board (ESRB), chaired by European Central Bank President Christine Lagarde, pointed out vulnerabilities in so-called “third country multi-issuer” stablecoin models and called for immediate policy action. Stablecoins, designed to maintain a steady value by pegging to fiat currencies or government securities, have surged over the past five years into a market worth more than $300 billion, according to DeFiLlama data. The sector is dominated by dollar-backed tokens, with Tether’s USDT controlling more than 58% of the market. Euro-backed tokens, by contrast, account for just 0.15% of the global total. The ESRB, during its 59th General Board meeting on September 25, stressed that interchangeable tokens issued both within and outside the EU contain “built-in vulnerabilities.” Lagarde Pushes Back on Offshore Stablecoin Structures Under MiCA Gaps Under this structure, EU-regulated issuers must hold reserves locally, while non-EU partners manage identical tokens backed abroad. Regulators warn that during times of stress, investors could rush to redeem in the EU, overwhelming local reserves and leaving the bloc exposed to offshore liabilities. According to people familiar with discussions, the ESRB endorsed a recommendation to ban such models. Though non-binding, the move places pressure on EU authorities to either impose restrictions or outline other protections. Both the ECB and ESRB declined to comment on the proposal, but Lagarde has repeatedly shown concern that the bloc’s regulatory framework, known as MiCA, leaves gaps in coverage for cross-border schemes. Lagarde compared the risk to past banking crises, where liquidity mismatches and inadequate reserves destabilized institutions across borders. She argued that unless strong equivalence regimes and safeguards for cross-border transfers are introduced, multi-issuer models should not be permitted to operate in Europe. The warnings come as global financial risks remain elevated. The ESRB noted that investor optimism has pushed asset valuations to record highs, leaving markets vulnerable to reversals. While stress tests show European banks are resilient, weak growth prospects and rising fiscal pressures continue to weigh on stability. The board pointed to ongoing geopolitical tensions and shifting trade policies as additional challenges for Europe’s financial outlook. Stablecoins Face Rising Global Scrutiny as Regulators Warn of Systemic Risks Stablecoins are also under scrutiny elsewhere. Earlier this month, the Bank of England’s Financial Policy Committee warned that poorly managed reserves could trigger fire sales and destabilize broader markets. The committee also flagged the risk of currency substitution, where foreign-denominated stablecoins weaken the use of domestic money. On October 1, Bank of England Governor Andrew Bailey said systemic stablecoins may gain access to central bank accounts but warned that such tokens could reshape Britain’s financial system by separating money-holding from credit provision. In the United States, regulators have moved in a different direction. In July, Congress passed the GENIUS Act, the first federal law covering stablecoins, which sets capital and reserve requirements for issuers. Analysts at Morningstar DBRS project the market could exceed $1 trillion in annual payments by 2030. The firm described stablecoins as programmable money, combining fiat stability with blockchain efficiency to deliver faster, cheaper payments compared to systems such as SWIFT or wire transfers. Still, the rapid expansion of stablecoins has unsettled parts of the U.S. banking sector. Trade associations warn that adoption could drain deposits and disrupt lending. Coinbase has countered this view by releasing research in August, arguing that fears of deposit flight are overstated and that stablecoins reinforce the global role of the dollar. The exchange noted that banks already hold trillions in reserves at the Federal Reserve, offering little benefit to depositors, while stablecoins provide higher yields and near-instant settlement. For European regulators, the debate extends beyond banking competition. Officials warn that reliance on dollar-based tokens undermines financial sovereignty and weakens the effectiveness of monetary policy. ECB adviser Jürgen Schaaf has cautioned that the dominance of U.S. issuers such as Tether and Circle leaves Europe dependent on offshore structures. Circle and Paxos are among the issuers most affected by the EU’s proposed restrictions. Both manage reserves primarily in U.S. dollars and short-term Treasuries, while their EU operations are overseen by regulators in France and Finland. Authorities in both countries have so far declined to comment. The ESRB said it will publish a detailed report on stablecoins, crypto-investment products, and multi-function financial groups in the coming weeks. Its latest risk dashboard shows systemic risks in the EU remain “elevated,” reinforcing why stablecoins are now viewed as a pressing concern