TLDR
- The European Systemic Risk Board warned on October 2 that cross-border stablecoin models pose serious financial stability risks without urgent safeguards
- The stablecoin market has grown to over $300 billion, with Tether’s USDT controlling more than 58% of the sector
- EU regulators are concerned that multi-issuer models allow investors to redeem tokens in the EU while reserves are held abroad
- The ESRB recommended banning stablecoin structures where identical tokens are issued both inside and outside the EU
- Global regulators including the Bank of England and Bank for International Settlements have raised similar concerns about stablecoin risks
The European Systemic Risk Board has called for immediate policy changes to address what it describes as serious vulnerabilities in cross-border stablecoin operations. The warning was issued on October 2 following the board’s 59th General Board meeting held on September 25.
At its meeting on 25 September, the General Board assessed the main risks to EU financial stability. Read the press release https://t.co/WHx4JHyIWc pic.twitter.com/YmVEGSIB4D
— European Systemic Risk Board (@ESRBofficial) October 2, 2025
The ESRB, chaired by European Central Bank President Christine Lagarde, focused its concerns on “third country multi-issuer” stablecoin models. These arrangements involve identical tokens being issued both within and outside the EU by different entities.
Under these structures, EU-regulated issuers must hold reserves locally while non-EU partners manage the same tokens backed by reserves abroad. The board warned this creates a mismatch that could destabilize the financial system during periods of stress.
The stablecoin market has expanded rapidly over the past five years. Data from DeFiLlama shows the sector is now worth more than $300 billion. Tether’s USDT dominates with over 58% market share. Euro-backed stablecoins represent just 0.15% of the global total.
The ESRB endorsed a recommendation to ban multi-issuer models operating across EU borders. While the recommendation is non-binding, it puts pressure on EU authorities to either implement restrictions or develop alternative protections. Both the ECB and ESRB declined to comment on the proposal.
Reserve Mismatch Concerns
Lagarde has expressed repeated concerns that the EU’s Markets in Crypto-Assets regulation leaves gaps in coverage for cross-border schemes. She compared the risk to past banking crises where liquidity mismatches and inadequate reserves caused institutions to fail across borders.
The board’s worry centers on redemption pressure. During market turbulence, investors could rush to redeem their stablecoins through EU-regulated issuers where protections are stronger. However, if reserves are held primarily offshore, local EU reserves might prove insufficient to meet demand.
This could force the ECB to intervene or leave European financial institutions exposed to liabilities they cannot control. Lagarde argued that without strong equivalence regimes and safeguards for cross-border transfers, these models should not be permitted in Europe.
The ESRB noted that global financial risks remain elevated. Investor optimism has pushed asset valuations to record highs, making markets vulnerable to sudden reversals. While stress tests show European banks can withstand shocks, weak growth and rising fiscal pressures continue to challenge stability.
Global Regulatory Scrutiny
Other jurisdictions are examining stablecoin risks through different lenses. The Bank of England’s Financial Policy Committee warned earlier this month that poorly managed reserves could trigger fire sales. The committee also flagged currency substitution risks where foreign-denominated stablecoins reduce use of domestic currency.
Bank of England Governor Andrew Bailey said on October 1 that systemic stablecoins might eventually access central bank accounts. However, he cautioned these tokens could reshape Britain’s financial system by separating money-holding from credit provision.
The Bank of England proposed last month capping individual stablecoin holdings at £10,000 to £20,000 and business holdings at £10 million. Coinbase criticized the proposal as restrictive and harmful to UK savers and the City of London.
In June, the Bank for International Settlements warned about risks to monetary sovereignty and capital flight from emerging markets. The organization also pointed to repeated instances where stablecoins failed to maintain their pegs.
The United States took a different approach in July when Congress passed the GENIUS Act. The law established the first federal framework for stablecoins, setting capital and reserve requirements for issuers. The act bans issuers from paying interest but allows exchanges to offer yields.
Analysts at Morningstar DBRS project the stablecoin market could exceed $1 trillion in annual payments by 2030. The firm described stablecoins as programmable money that combines fiat stability with blockchain efficiency for faster and cheaper payments than traditional systems.
U.S. banking trade associations have warned that stablecoin adoption could drain deposits and disrupt lending. Coinbase released research in August arguing these fears are overstated and that stablecoins strengthen the dollar’s global role.
European officials worry that reliance on dollar-based tokens undermines financial sovereignty and weakens monetary policy effectiveness. ECB adviser Jürgen Schaaf has cautioned that the dominance of U.S. issuers like Tether and Circle makes Europe dependent on offshore structures.
Circle and Paxos are among the issuers most affected by the proposed EU restrictions. Both companies manage reserves primarily in U.S. dollars and short-term Treasuries. Their EU operations are overseen by regulators in France and Finland, though authorities in both countries have declined to comment.
Hong Kong implemented stablecoin legislation on August 1. Authorities have since issued multiple warnings about speculation-driven market swings tied to licensing rumors. They stated last month that no yuan-pegged stablecoins have received approval in the city.
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.
