A new debate is taking shape in Europe as regulators turn their focus toward stablecoins. Reports suggest that the European Systemic Risk Board, an EU watchdog, has recommended a ban on certain types of stablecoins that operate across both EU and non-EU jurisdictions. The move is not legally binding but could pressure national authorities to take stronger positions. This comes as the European Central Bank continues to highlight risks around foreign-issued stablecoins and works on developing its own digital euro project.

ESRB Recommendation

The European Systemic Risk Board (ESRB) issued guidance last week recommending a ban on what it calls multi-issuance or cross-jurisdictional stablecoins. These are tokens that are issued jointly in the EU and outside the bloc, with reserves managed across different legal systems. While the guidance does not carry the force of law, it has been backed by EU central bank governors and officials, giving it significant influence.

The ESRB cited concerns about liquidity mismatches and redemption challenges as central risks. In a scenario where European holders of such tokens attempted large-scale redemptions, reserves available within the EU might not be sufficient to meet demand. This could lead to instability, especially given that many reserves are held in assets outside the eurozone, often denominated in US dollars.

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Risks Highlighted by Policymakers

Christine Lagarde, President of the European Central Bank, has been vocal in recent months about the risks tied to non-EU stablecoin issuers. In earlier remarks, she called for policymakers to close regulatory gaps, pointing to potential vulnerabilities in stablecoins backed by foreign reserves. Similarly, an Italian central bank official raised concerns that multi-issuance stablecoins could pose systemic risks to the EU’s financial stability.

The ESRB’s warning echoes these views, noting that fragmented oversight between jurisdictions could create legal uncertainties and operational vulnerabilities. The concern is not limited to liquidity. It also includes the possibility that stablecoin issuers outside the EU could gain advantages in the European market without meeting the same standards as EU-based issuers under the bloc’s Markets in Crypto-Assets (MiCA) regulation.

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Impact on Stablecoin Issuers

Major issuers like Circle, which operates USDコイン (USDC), and Paxos, known for Pax Dollar (USDP), are seen as potentially affected by this recommendation. Their tokens are globally fungible but rely on reserve management models that stretch across different jurisdictions. Under the ESRB’s view, such models could challenge the competitiveness of euro-denominated stablecoins and reduce the ability of EU projects to establish themselves in tokenized markets.

The recommendation does not amount to a ban today, but it signals a tightening environment for non-EU stablecoins. Issuers may need to rethink their operational models in Europe, either by aligning more closely with MiCA rules or by restricting how their stablecoins are issued within the region.

Digital Euro Developments

The backdrop to this discussion is the European Union’s exploration of a central bank digital currency. The digital euro has been under review since 2021, with ECB officials signaling that member states could agree on its framework before the end of this year. A potential rollout has been discussed for 2029.

Piero Cipollone, an ECB executive board member, recently stated that the digital euro is being designed as a safe, reliable, and universally accessible form of central bank money. Officials see it as a complement to physical cash and a tool to strengthen Europe’s financial resilience in a digital age. For some observers, the ESRB’s stance on stablecoins appears to align with this broader strategy, ensuring that private and foreign-issued tokens do not undermine the development of an official European alternative.

What Comes Next for Stablecoins in the EU

The report that an EU watchdog pushes for stablecoin ban has introduced new uncertainty into Europe’s crypto market. While the recommendation is not binding, it reflects growing caution from policymakers and signals tougher scrutiny ahead. For issuers like Circle and Paxos, the guidance highlights the need to adapt to a more demanding regulatory environment. As the EU advances toward a potential digital euro, the future of stablecoins in the region will depend on how closely they can align with Europe’s evolving rules and priorities.