The European Systemic Risk Board has delivered a stark warning that could reshape the future of digital finance across the continent. In a comprehensive report published in October 2025, the ESRB highlighted growing concerns about stablecoin arrangements that span multiple jurisdictions. These cross-border digital currency schemes present unprecedented challenges to financial stability and regulatory oversight.
Multi-issuer stablecoin schemes create unprecedented regulatory challenges
ESRB’s report is intensively focused on multi-issuer stablecoin schemes, through which entities within the EU enter into cooperation with third-country firms for the issuance of fungible digital tokens. In these arrangements, there is a distribution of reserves corresponding to stablecoins across more than one country, while still being marketed as fully substitutable based on their point of origin of issuance. Some ambiguities arise due to these cross-border structures, especially because MiCAR did not foresee this model of issuance before its inception.
The market capitalization of stablecoins has more than doubled since the last report on crypto-assets and decentralized finance by ESRB in May 2023. One of the contributing factors towards this surge is that US crypto policies have encouraged the adoption of US dollar-denominated stablecoins, leading to more linkages between stablecoins and other financial institutions. These linkages entail stablecoin reserve backups that are held in commercial banks and pose systemic risk.
Fragmented reserves enhance systemic risk
Fragmented reserves across many countries and legal systems create inherent problems within a stablecoin’s value-coverage system. Under EU law, redemptions at close to market and for free are required, while third-country issuers may differentiate on this point, possibly applying fees or delays during stressed times.
Hidden risks emerge from cross-border redemption dynamics
According to ESRB, there is a risk that holders of tokens of third-country issuers may want to redeem their tokens within the EU, should more favorable conditions be available, especially because redemption fees are barred by MiCAR rules. Such arbitrage poses a risk of dangerous dynamics, especially because holders of tokens within the EU could be exposed to redemption runs by holders of tokens from other countries. The business model creates multiple inherent vulnerabilities that generate financial stability risks:
- Redemption runs: Regulatory arbitrage allows for favorable redemption conditions in other countries.
- Reserve ring-fencing: Third-country authorities may withhold reserves held within their countries during times of crisis.
- Liquidity fragmentation: Reserve flows across borders are hindered by practical and legal issues.
- Contagion channels: Banking sector exposure via stablecoin-related funding.
Third-country authorities could then pursue ‘ring-fencing’ policies during bouts of stress, withholding local reserves and putting redemptions at risk within the EU. Such national ‘ring-fencing’ of liquidity has occurred within the EU itself during bouts of stress experienced by banks in autumn 2008 and spring 2020, despite legal prohibitions on barriers to capital flows.
ESRB recommends a comprehensive framework of regulations
The ESRB General Board has adopted a formal recommendation on third-country multi-issuer stablecoin arrangements, based on risk, market, and legal framework considerations of the identified potential risks. This two-pronged strategy is intended for addressing short-term risks, as well as implementing longer-term measures to secure financial stability.
The regulatory approach includes specific timeline requirements:
- Immediate clarification (by end-2025): The European Commission should clarify that multi-issuer schemes are not allowed under the existing MiCAR framework
- Strengthened protections (by end-2026): Enforcement of supervisory measures, cooperation protocols, and legal changes if an explanation is not received
- Comprehensive implementation (by end-2027): Implementation of all remaining measures of protection and monitoring
The regulations and responses demonstrate a growing awareness that digital finance innovations need evolving supervisory structures that can deal with issues of complexity that have cross-border implications. ESRB’s strategy covers international cooperation as one of its most essential elements, along with having strong standards of protecting investors. By monitoring and implementing efforts, European authorities work towards stablecoin innovation that does not jeopardize financial stability in Europe.