Christine Lagarde made the most detailed public case against the adoption of euro stablecoins from the head of a major central bank at a forum in Spain on Friday. This wasn’t about technology. It was about the logic that the adoption of a euro stablecoin would benefit the role of the euro internationally. Lagarde’s argument is that the two are independent: confusing the two leads to incorrect policy conclusions.
The speech came at a time when the market for stablecoins has exploded from under $10 billion six years ago to over $300 billion today, with almost 98 percent denominated in USD. Two entities, Tether (based in El Salvador) and Circle (U.S.-based), dominate 90 percent of the market. The U.S. is currently working to solidify this status quo through the GENIUS Act, which their government openly describes as intended to “preserve dollar dominance and Treasury demand.”
In that context, the argument becoming popular in EU policy spheres is straightforward: If Europe doesn’t foster euro stablecoins, it will lose the game of digital finance. The Lagarde speech is a direct call to fight with that logic.
Separating what stablecoins actually do
The centerpiece of her argument is actually a division that has been consistently overlooked throughout much of this current debate. Stablecoins are in fact functioning in two different ways, and the two have been constantly conflated: a monetary function and a technological function.
The money function relates to dollar reach. Stablecoins provide dollar payment systems outside the traditional financial infrastructure and make cross-border holdings less costly, turning retail stablecoin holders into indirect U.S. dollar government debt holders if such stablecoins pay interest at appropriate rates. Its size is already evident in certain regions of the developing world, with stablecoin transaction volumes at ~7.7 percent of GDP for Latin America and ~6.7 percent of GDP for Africa & the Middle East, respectively, indicating true dollarization is ongoing.
The technological role is distinct. As financial assets move onto DLT and are tokenized, the underlying platforms require a settlement asset that lives natively on the same network. Default role has been assumed by stablecoins. They function as the cash leg for atomic settlement (when two assets are exchanged in a single atomic transaction, without settlement risk), purely based on infrastructure requirements, not a monetary choice.
Lagarde makes her point that when the stated two functions are separated, it changes the case for euro stablecoins, and this appears weak if we consider it from a monetary perspective. This can be addressed utilizing the public infrastructure operating on the technological side.
The monetary case: fragility and feedback loops
When SVB failed in March 2023, Circle revealed they had $3.3 billion in USDC reserves at SVB, and USDC dropped as low as $0.877. There was one bank following this. When there’s an event that leads to a multi-bank stress event, this same mechanism plays out in magnitude; large-scale redemption leads to rapid-fire sales of short-dated Treasuries and yields spike, just as financial conditions were already getting tight.
The second point was also added by the ECB research: the bank lending channel is getting narrowed by the large-scale deposit shift into the nonbank stablecoins. This also weakened the rate pass-through to the real economy, a more acute problem in Europe, where domination is by bank credit.
The industry counter: Lagarde is creating a false choice
Not everyone in the ecosystem accepts the ECB’s framing. Renna Ba, Head of Ecosystem at Morph, argues that the ECB’s position trades one set of risks for another.
“While President Lagarde’s focus on monetary stability is prudent, a restrictive stance on private euro stablecoins may stifle the very innovation Europe needs. Relying solely on a central bank digital currency risks ceding the digital frontier to dollar-backed assets. The ECB could consider a more collaborative model by providing clear regulatory pathways for private issuers that meet rigorous transparency and liquidity standards. By fostering an ecosystem where private stablecoins and the digital euro coexist, Europe can lower financing costs and enhance the euro’s global competitiveness without compromising financial integrity.”
The case itself holds up to some extent. Firstly, dollar stablecoins, through the existing first-mover advantages and network effects that operate in tokenized markets, benefit considerably by being present first, and by allowing the public infrastructure to fall behind the technology, they will risk surrendering valuable ground in an area from which it is hard to gain back market share. The existence of a regulated European market for a euro stablecoin (as an existing framework already exists in MiCAR) would arguably do at least one thing, which is prevent even greater dominance of USD-denominated instruments within the European tokenized markets.
However, Lagarde’s statement is far from a rejection of private issuers. Yet, there is a distinction to be made here: protections under MiCAR only benefit EU issuers. For hybrid, multiple-issuer arrangements that involve both EU and non-EU issuers, a run will thus place concentrated redemption demands on the EU issuer (the jurisdiction with the best protections where redemption fees may not be charged), even though the reserves backing the EU side should not cover it.
The infrastructure answer: Pontes and Appia
A quantifiable issue is the fragmentation of EU financial market infrastructure. There are currently 295 EU trading venues, 32 central securities depositories and 14 central clearing counterparties, compared to one central securities depository and two central clearing houses in the U.S. DLT offers a consolidation channel that decades of conventional reform have not been able to.
What the data implies for market participants
B2B cross-border is ~60 percent of the stablecoin payment volume but is only 0.01 percent of the world’s B2B payments volume. The dominance of USD stablecoins in tokenized finance is explained by network effects as early movers, not structural lock-in. The Treasury bill sensitivity data is interesting for firms exposed to the reserves, with a $3.5 billion flow having the ability to shift 3-month T-bills 2.5-3.5 basis points under normal circumstances.