Highlights: Contagion Risk: ECB sees threat from U.S.-backed stablecoins. MiCA Concerns: EU regulation may lack strength to respond. Digital Euro Push: ECB urges euro-backed alternative development.

Hifi Tech India

The European Central Bank believes United States President Donald Trump's support for the cryptocurrency industry may cause financial "contagion" — a word frequently used amid last cycle's fallout from collapsed crypto exchange FTX, failed CeFi crypto-lending platform BlockFi and collapsed DeFi project Terra Luna — putting the European economy at risk, according to a policy paper seen and reported on by Politico.

The European Commission, however, has reportedly pushed back on the ECB's analysis of the situation across the Atlantic — highlighting an ongoing debate on the continent over the Trump administration's embrace of the relatively new sector to strengthen the dollar's reach and promote asset inflows into the U.S., specifically via stablecoins.

The arguments in Europe follow 2023's Markets in Crypto Asset regulation, which has widely been considered the first significant legislation designed around cryptocurrency firms. Among other things, MiCA limits the issuance of foreign-currency-backed stablecoins. Two newly drafted laws in the U.S. meant largely to extend the reach of dollar-backed stablecoins — STABLE and GENIUS — are unsettling the ECB, which fears MiCA may not be strong enough to combat their effects.

One EU official has claimed, according to Politico, that the ECB has been overplaying the threat of stablecoins to garner political support for its controversial digital euro project. However, the ECB argues that, should EU issuers be forced to redeem foreign-held tokens alongside European ones, there could be a "run" on their reserves.