The European Central Bank (ECB) just flagged stablecoins as a global threat. Again. On Monday, the bank put out a pre-release of its financial stability review, warning that the sudden rise in these tokens needs serious attention.

Even though things look fine right now, the bank says that could change real fast if stablecoins get adopted for more uses.

“Stablecoins are growing rapidly and they may find adoption across new use cases, which could introduce financial-stability risks in the future,” the ECB said.

One of the biggest issues? If people start swapping bank deposits for stablecoins, banks could lose a big source of funding. “Diminishing an important source of funding for banks and leaving them with more volatile funding overall,” is how the bank described it.

This all comes as U.S. lawmakers pass the GENIUS Act, a new law giving stablecoins an official status in the eyes of the U.S. government, triggering a surge in total market cap to $280 billion, an all-time high.

ECB demands global rules for stablecoins before it’s too late

With stablecoin activity spreading across borders, the ECB warned about regulatory arbitrage. That’s when firms take advantage of weaker rules in some countries.

The bank said it’s “vital that regulatory frameworks are further aligned at a global level.” If not, companies will just go where the rules are softest.

A major red flag is the growth of multi-issuance schemes, stablecoins launched jointly by issuers inside and outside the EU. These setups, the ECB says, are dangerous without stricter checks.

The bank wants “additional safeguards, imposing preconditions that must be met before EU market access is authorized.”

In short, no shortcuts. But that’s not all. The European Systemic Risk Board (ESRB) wants these multi-issuance stablecoins banned altogether. The guidance was signed off on by top EU officials and central bank governors.

While it’s not legally binding, it puts huge pressure on authorities to either follow the recommendations or publicly explain why they won’t. The ESRB also suggested an alternative, tighter safeguards for these stablecoins, but called it a “less optimal” move.

The person backing the ban? That would be Christine Lagarde, president of the ECB and chair of the ESRB’s board. Christine has been warning about the risks of foreign-linked stablecoins for years.

She previously said foreign holders having claims on EU-based issuers bring “significant legal, operational, liquidity and financial stability risks at EU level.”

US-based firms like Circle and Paxos now face uncertainty in Europe

Two companies likely in the crosshairs are Paxos and Circle, both licensed to operate in the EU. Paxos is under Finland’s watch, while France oversees Circle.

Neither country’s regulator has commented. But both firms are based in the United States, which has been way more relaxed on crypto. That’s made some European officials nervous.

The ECB doesn’t like that most of the reserves backing Circle and Paxos stablecoins are parked in U.S. dollar assets, including short-term Treasury bills.

So, even though the coins circulate in Europe, the money behind them is tied up in America. That goes against the Savings and Investment Union strategy, which is supposed to keep capital inside the EU.

The ECB has been working on its own central bank digital currency since 2021, a digital version of the euro. But that project is stuck waiting for legal backing. In the meantime, other European regulators are calling for clarity.

Last month, the Bank of Italy told the European Commission to settle the legal debate around cross-border stablecoins once and for all.

Join Bybit now and claim a $50 bonus in minutes