Stablecoins are already a $308 billion market that some suggest could reach $1 trillion by the end of this decade.
But for the European Union Systemic Risk Board, the burgeoning market poses real risks for both crypto and traditional finance.
In a report this month, the ESRB called for the EU’s Markets in Crypto-Assets, or MiCA, regulations to be strengthened against non-compliant stablecoins used by investors in the region.
The report said such measures are necessary to protect the eurozone from disorderly outflows from the region’s financial markets.
The liquidity that underpins stablecoins could negatively affect bond markets during extreme panic. That’s because the bulk of the reserves held by large stablecoin issuers, such as Tether and Circle, are parked in short-term US Treasury bills.
There are roughly $129 billion in bonds backing USDT and USDC, respectively.
The report warned that stress scenarios could trigger a bank run and prompt a mass dumping of these reserve assets.