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The European Central Bank (ECB) has expressed concern: the rapid adoption of stablecoins could lead to an outflow of deposits from banks and weaken the effectiveness of the transmission of monetary policy to credit, according to a new ECB working paper.

The growing popularity of stablecoins, which are digital assets often pegged to currencies such as the U.S. dollar or euro, is expected to lead to withdrawals from orderly bank accounts, the ECB said in its latest series of working papers titled “Stablecoins and the transmission of monetary policy” on Tuesday.

Our analysis shows that the increased interest in stablecoins correlates with a marked drop in retail bank deposits and a decline in corporate lending, ECB experts said, adding that stablecoins could reduce the amount of credit provided by banks to the real economy.

The ECB pointed out that this effect is not linear and depends on the degree of spread of steblecoins, their structure and the regulatory mechanisms used.

The report is part of the ECB’s ongoing effort to study the steblecoins, whose market value has more than doubled over the past three years to 312 billion dollars, with a projected growth to 2 trillion dollars by 2028.

To assess the impact of the widespread use of stablecoins on the banking sector, the ECB focused on the deposit substitution effect, where households and organizations move their funds from standard bank deposits to digital assets.

Financial institutions rely heavily on deposits as a reliable and cost-effective source of funding to support lending to households and businesses, the article said. As deposits shrink, banks may be forced to rely more heavily on wholesale or market funding, which tends to be more expensive and less stable.

The paper also argues that stablecoins could change the impact of key rates on bank funding and lending costs, with the extent of the impact determined by the level of implementation, design and supervisory measures.

We find that the introduction of stablecoins disrupts multiple channels of monetary transmission, potentially reducing the predictability of regulatory action, the authors conclude.

The paper also emphasizes additional concerns related to the rise of cryptocurrency stablcoins. According to the authors, this could further weaken the link between domestic monetary policy and bank lending, and the risks increase when non-euro-denominated tokens dominate circulation.

ECB officials have previously warned that the proliferation of dollar-denominated stablecoins could call into question monetary sovereignty and the euro’s role in international settlements.