ECB's Schnabel warns rising stablecoin adoption could entrench dollar dominance

FRANKFURT, June 1 (Reuters) – The rapid proliferation of stablecoins—cryptocurrencies designed to maintain a fixed value by being pegged to traditional assets—could entrench U.S. dollar dominance, erode the monetary sovereignty of certain countries, and even marginalize the euro, European Central Bank board member Isabel Schnabel warned on Monday.

While the use of stablecoins remains relatively modest, adoption has accelerated sharply in recent months, and modeling by analysts suggests further explosive growth ahead. The vast majority of stablecoins are tethered to the U.S. dollar, and a surge in their issuance could slow or even reverse a two-decade-long erosion of the dollar's global role, some economists argue.

“The dollar’s dominance would be reinforced, not necessarily owing to stronger economic fundamentals but due to network effects, scale and first-mover advantages,” Schnabel told a Bank of Korea conference in Seoul, referring to the rise in stablecoin usage.

Data from the International Monetary Fund shows the dollar’s share of foreign exchange reserves fell to below 57% last year, down from 70% at the turn of the century, as smaller currencies gained ground. However, a stablecoin-driven boost to the dollar could halt or reverse that trend, particularly in countries where monetary policy lacks credibility.

Schnabel noted that the implications could extend to the euro as well. A vicious cycle could emerge: in countries with weak policy credibility, people may increasingly turn to dollar-based stablecoins, further weakening the central bank’s ability to transmit policy changes to the real economy.

“Even for regions with strong monetary credibility, the persistent dominance of U.S. dollar stablecoins could, over time, have undesirable consequences if it strengthens U.S. dollar invoicing and global liquidity holdings,” Schnabel said. “From a European perspective, this could eventually limit the euro’s role in emerging forms of tokenised finance and in the international monetary system more generally.”

The remarks come as central banks worldwide grapple with the implications of digital currencies and stablecoins for financial stability and monetary sovereignty. While the ECB is exploring a digital euro, Schnabel’s comments underscore the urgency of ensuring the euro remains competitive in an increasingly tokenized financial landscape.

(Reporting by Balazs Koranyi; editing by Barbara Lewis)