Euro stablecoins and their potential effect on sovereign bond markets

Stablecoins denominated in US dollars have attracted considerable attention in the context of their growing influence in US Treasury markets. However, the potential effects of euro-denominated stablecoins on euro area sovereign debt markets have been less explored, partly owing to their currently limited market presence. This article explores how the growth of euro-denominated stablecoins could affect demand for euro area sovereign bonds. By determining the pass-through rate of stablecoin demand to sovereign bond holdings by way of several illustrative examples, we demonstrate how the effect varies based on whether stablecoins are issued by banks or e-money institutions (EMIs), on the composition of stablecoin reserve assets, and on the liquidity management preferences of banks and EMIs. Moreover, the net effect hinges on the sectoral origins of stablecoin inflows, which vary according to what stablecoins are, and will be, used for. We also argue that on the one hand, the deposit requirement for EMIs set out in the European Union’s Markets in Crypto-Assets Regulation (MiCAR) can act as a liquidity buffer during periods of stress, reducing the likelihood of immediate sales of other reserve assets, on the other hand it could also transmit stress arising from a stablecoin run to the banking system.