Could Stablecoins Trigger the Next Financial Crisis?
And why Europe needs a vibrant euro stablecoin ecosystem to prevent contagion
In 1994, a group of young JPMorgan bankers at a Florida pool party invented credit default swaps while throwing their bosses into the water. They thought they were building the future of finance—and they were right. One later wrote: “What kind of monster has been created here? It’s like you raised a cute kid who then grew up and committed a horrible crime.”
That “cute kid” helped trigger the 2008 financial crisis. But in time, credit default swaps found their place in the system. Once opaque and dangerous, they became manageable—used more carefully, priced more accurately, and subject to tighter rules.
Now, in 2025, a new generation of financial products is following a similar pattern. For instance, as recently reported and discussed by Bloomberg’s Matt Levine, the first autocallable ETF has just launched. It promises 15% annual returns in stable markets and targets a yield-hungry older investor base. But like earlier structured products, it hides tail risk. If the market stays within a set range, the product pays out and ends. If the market drops, it keeps going. And if there's a crash, investors can lose much more than they expect.
These instruments are complex by design but sold as simple. Many investors only discover the risks too late. Industry veterans have a saying: “No one buys just one.” The early returns feel safe and predictable, so investors keep buying more—until a market shock reveals the hidden downside.
Stablecoins may look even simpler, but they pose a different kind of danger. Unlike autocallables, stablecoins aren’t designed to deliver yield. They exist to offer digital convenience: cash-like utility, fast transfers, low friction. They seem harmless. That’s what makes their risks harder to spot.
Underneath the surface, most major stablecoins are deeply tied to the traditional financial system—through bank deposits, money market funds, and short-term debt. These links mean that stress in one part of the system can spill into another. In a crisis, a run on stablecoins could trigger liquidity shocks far beyond the crypto world. Most users have no idea how much fragility they’re exposed to.
This mix of simplicity, scale, and hidden risk echoes earlier episodes in financial history. As economists like Carlota Perez and Bill Janeway, and analysts like Byrne Hobart have observed, major innovations often follow a cycle: rapid growth, excessive risk-taking, sudden collapse, and then real progress built on stronger foundations.
The $250 billion stablecoin market sits near the peak of that cycle. Growth has outpaced regulation. Adoption has outpaced understanding. The crash has not yet come, but when it does, the reshaping of digital finance will begin in earnest.
Europe cannot afford to sit out this phase. It needs to engage now—not just to stay competitive in the next wave of infrastructure, but to build its own ecosystem. Without that, it risks dependence on dollar-based stablecoins and exposure to crises rooted in a financial system it does not control. Participating in the learning phase is the only way to shape what comes after.
The Crisis Transmission Mechanism
Understanding how a stablecoin crisis could unfold requires examining the structural vulnerabilities that current market conditions have created. Like autocallable ETFs, stablecoins appear deceptively simple whilst masking fundamental mismatches that could interact catastrophically under stress.
The first vulnerability involves speed. Stablecoin redemptions happen at digital speed—users can withdraw funds with a few taps on their phone, 24 hours a day, seven days a week. But stablecoin issuers cannot liquidate their backing assets nearly as quickly. This creates the same liquidity mismatch that brought down major UK mortgage lender Northern Rock in 2007, except amplified by technology that enables global bank runs to unfold in hours rather than days.
The second vulnerability concerns safety assumptions. Bank deposits benefit from government insurance schemes that protect savers even if the institution fails. Stablecoin holders have no such protection, yet many users assume similar safety because the tokens are marketed as “stable” and backed by government securities. This misplaced confidence could shatter rapidly once redemption pressures begin. The growing interest in tokenised deposits—with JPMorgan leading development and UK regulators encouraging banks to explore this model—reflects institutional recognition of this protection gap, though it also signals how traditional banking is adapting to compete with stablecoins rather than simply dismissing them.
The third vulnerability involves interconnection with traditional finance. Stablecoins now hold approximately $200 billion in the same short-term Treasury bills and commercial paper that money market funds depend upon, with Tether alone ranking as the seventh-largest holder of US Treasuries globally. This creates a dangerous feedback loop: when stablecoin issuers face redemption pressure, they must sell these assets, which puts pressure on money market funds holding identical securities, which can trigger broader market stress that flows back to stablecoins.
The mechanics of crisis transmission would likely follow a three-act pattern:
Initially, a major stablecoin issuer faces redemption pressure during market stress—perhaps from spiking Treasury yields, seizing commercial paper markets, or a banking partner's failure. Unlike traditional financial institutions with regulatory backstops, stablecoin issuers must meet redemptions from their reserves or face immediate collapse.
As redemption pressure mounts, the issuer begins fire-selling Treasury bills and commercial paper to raise cash. This creates downward pressure on the prices of these “risk-free” assets, which forces money market funds holding identical securities to mark down their net asset values. The psychological effect proves devastating: if Treasury bills and commercial paper—the safest assets in the financial system—are falling in price, where can investors find safety?
The final act involves system-wide contagion as banks holding these securities face losses, money market funds experience redemption waves, and the Federal Reserve confronts an impossible choice between letting Treasury markets collapse or intervening to save crypto-backed financial instruments it barely regulates. This vulnerability has deepened following recent regulatory changes that relaxed capital requirements for banks holding Treasury bonds, encouraging institutions to pile into these assets without adequate collateralisation—meaning they lack sufficient liquidity buffers when forced selling begins. Unlike 2008's subprime crisis, which unfolded over months, this scenario could complete in hours due to digital assets' instantaneous settlement.
All in all, the digital speed and Treasury market interconnection would likely force the Federal Reserve into immediate intervention, creating precedent for backstopping crypto-backed financial infrastructure despite minimal regulatory oversight.
America's Strategic Calculation
The US appears to be embracing stablecoin growth despite these systemic risks, calculating that the benefits outweigh the dangers. Treasury Secretary Scott Bessent's projection of $3.7 trillion in stablecoin-induced Treasury demand reveals the fiscal motivation: private innovation that simultaneously supports government financing.
The recently passed GENIUS Act, which was signed into law by President Trump just a few days ago, demonstrates this strategic calculation. Rather than constraining stablecoin growth, the legislation provides regulatory clarity designed to accelerate adoption. American policymakers seem willing to accept crisis risk as the price of maintaining dollar dominance in digital finance infrastructure.
This approach reflects sophisticated understanding of technology adoption cycles. Breakthrough technologies often require bubble-scale capital deployment to achieve critical mass. The internet, railroads, and telecommunications all followed similar patterns of speculative excess followed by crash-tested infrastructure that enabled genuine innovation. Even products like autocallable ETFs represent attempts to channel retail capital into complex strategies, accepting periodic losses as the cost of market development.
Silicon Valley's approach to stablecoins follows this playbook deliberately. Massive capital deployment funds parallel development of payment rails, merchant acceptance networks, and regulatory frameworks—precisely the kind of coordinated investment that bubbles excel at financing. When the inevitable crisis arrives, well-capitalised survivors will dominate the post-crash rebuilding with accumulated operational knowledge that cannot be replicated through theoretical study.
The timing of American regulatory clarity supports this interpretation. The GENIUS Act's permissive framework enables rapid scaling precisely when other jurisdictions remain cautious. If stablecoins trigger financial instability, American companies will have gained crucial experience managing large-scale digital currency operations under stress—knowledge that could prove decisive in shaping post-crisis monetary infrastructure.
Europe's Strategic Dilemma
Meanwhile, Europe faces an uncomfortable choice between embracing systemic risk and ceding technological leadership. The European Central Bank's measured approach to digital currencies reflects legitimate concerns about monetary sovereignty and financial stability. Yet caution creates strategic vulnerabilities that could prove more dangerous than controlled risk-taking.
Without hands-on experience managing large-scale stablecoin operations, European institutions will lack crucial knowledge when post-crisis opportunities emerge. If American companies are the only ones building the dominant stablecoin infrastructure, Europe risks monetary dependency on foreign platforms. The most innovative European technologists may relocate to jurisdictions that permit aggressive stablecoin experimentation.
More critically, having robust euro stablecoin operations that can weather a crisis creates the opportunity to strengthen the euro's position during the chaos. When dollar-denominated stablecoins face redemption pressure, well-capitalised euro alternatives could step in to provide stability and capture fleeing users, potentially shifting the global stablecoin ecosystem towards euro dominance.
Christine Lagarde's recent warnings about dollar stablecoin adoption reveal the ECB's growing alarm. Higher-yield offshore dollar tokens could facilitate frictionless capital flight during the next crisis, particularly as tokenised money market funds enable euro savers to access US Treasury bill yields with the click of a button. This digital dollarisation extends American monetary influence to populations that might never directly interact with the US financial system—as seen across Africa, where USD stablecoins now represent 43% of all recorded onchain transactions and have become the primary coordination mechanism for the continent's massive parallel dollar economy.
The autocallable ETF phenomenon demonstrates how quickly complex products can achieve retail adoption when they offer yield enhancement. European savers seeking alternatives to negative interest rates could rapidly embrace dollar-denominated stablecoins, creating the same yield-seeking accumulation patterns that make autocallables attractive until crisis strikes.
Europe's fragmented response compounds these challenges. The European Commission supports fungibility between US-issued and EU-issued stablecoins, possibly as part of broader trade negotiations with Washington. The ECB opposes this integration, fearing it could import weaker regulatory standards and accelerate bank runs. This internal discord creates policy paralysis where Europe achieves neither thriving private stablecoin ecosystems nor functioning central bank digital currencies.
Europe's Strategic Response
Rather than choosing between reckless embrace and protective avoidance, Europe must pursue coordinated preparation for inevitable stablecoin adoption. The goal is building resilient infrastructure that can weather coming storms whilst preserving European monetary sovereignty.
A vibrant euro stablecoin ecosystem represents Europe's best defence against contagion from a dollar-denominated crisis. When redemption pressure builds in USDT or USDC, users need alternatives that remain functional. Yet with less than 1% of global market share despite the euro representing 20% of foreign exchange reserves, European alternatives currently lack the liquidity necessary to absorb flight from dollar-denominated tokens:
Infrastructure Foundation: European policymakers should implement a wholesale euro CBDC designed exclusively for interbank settlements, providing unified monetary infrastructure that euro stablecoin issuers can leverage. This solves the fragmented collateral problem—whilst the US relies on Treasury bills as unified collateral, Europe needs coordinated infrastructure enabling stablecoin issuers to manage German bunds, French OATs, Italian BTPs, and other instruments with varying risk profiles.
Crisis Preparedness: The Fed's March 2020 ETF interventions demonstrate that digital asset stress requires immediate central bank response. European authorities should conduct regular simulation exercises modelling stablecoin redemption scenarios and develop contingency plans for providing liquidity support to euro stablecoin issuers during stress periods.
Competitive Positioning: The autocallable ETF example demonstrates how American financial innovation continues pushing boundaries through bubble-scale capital deployment whilst European alternatives remain constrained by prudential concerns. Success demands thinking like venture capitalists whilst acting like central bankers—embracing controlled risk rather than avoiding it entirely.
The window for influence remains open, but timing creates urgency. Secretary Bessent's $3.7 trillion projection represents massive Treasury demand extending American monetary influence globally. Every day European institutions delay coordinated action, this digital dollarisation deepens. Continue restricting whilst competitors innovate, and Europe cedes digital finance leadership permanently.
Conclusion: Beyond Risk Management
The question is not whether stablecoins will trigger a financial crisis. Given current trajectories and structural vulnerabilities, this appears increasingly likely. The question is whether Europe will participate sufficiently in the pre-crisis learning phase to maintain competitiveness in the post-crisis rebuilding period, all while preventing massive contagion when the crisis erupts.
A stablecoin-triggered crisis would most immediately resemble the 2008 money market fund collapse, especially regarding liquidity mismatches, opacity, and panic-driven contagion. However, the digital speed of execution could compress months of crisis evolution into days or hours, whilst the interconnection with Treasury markets could threaten the foundation of global finance rather than its periphery. The ETF stress episodes of March 2020 provide a preview of how digital financial products require immediate central bank intervention during crisis periods.
Europe's traditional risk-averse approach—regulatory sandboxes, coordination mechanisms, and incremental experimentation—will prove inadequate against the American strategy of aggressive capital deployment to achieve escape velocity in stablecoin adoption. The comfortable assumption that prudent incrementalism can compete with bubble-scale investment must be abandoned.
The third way Europe seeks exists, but requires strategic coherence that treats CBDCs and stablecoins as complementary infrastructure rather than competing paradigms. By building resilient euro stablecoin ecosystems now, Europe can preserve monetary sovereignty whilst enabling innovation that serves both financial stability and competitiveness.
The infrastructure being built today will determine how Europeans access financial services, how European businesses compete globally, and how the euro functions in a digital economy. The window for influence remains open, but it will not stay that way indefinitely. Continue restricting whilst competitors innovate, and Europe cedes digital finance leadership permanently. Embrace strategic preparation, and Europe can weather the coming storm whilst emerging stronger.
Recommended in the euro stablecoin space:
Tokenized Equities and the Stablecoin Playbook (Pierre Fougeat, On-Chain Power, 17 July 2025)
Stablecoins are a revolution, and Europe can't miss the moment (Nicolas Colin & Marieke Flament, The Big Whale, 16 July 2025)
Stablecoins Are Waking Up Wirecard-Scarred Germany ($) (Lionel Laurent, Bloomberg, 1 July 2025)
Recommended more broadly in stablecoins:
Genius Act Signed into Law, Establishing First Federal Stablecoin Framework (Jeff Robins, Jung Eun Choi, Patrick Fuller, Jon Henney, Debevoise & Plimpton, 21 July 2025)
The UK’s laggard approach to stablecoins reveals so much (£) (Paul Marshall, The Financial Times, 20 July 2025)
Chartbook 397 Dollar trap or empire by invitation? The global political economy of the dollar system. (Adam Tooze, Chartbook, 20 July 2025)
Stablecoins: GENIUS or Big Bank Trojan Horse? (Chuck Stoops, LinkedIn, 18 July 2025)
Regulating Stablecoins Will Take a Genius Act, and This Isn’t It ($) (Alison Schrager, Bloomberg, 18 July 2025)
Stablecoins might cut America’s debt payments. But at what cost? (£) (The Economist, 16 July 2025)
Ex-Coinbase exec raises $12.5 million for Dakota, a stablecoin-powered neobank | Fortune Crypto (Ben Weiss, Fortune, 15 July 2025)
Bessent’s Interest Rate Bet Could Be a Big Loser ($) (Bill Dudley, Bloomberg, 15 July 2025)
1:1 Redemptions for Some, Not All (Ashwanth Samuel, Dan Aronoff, and Neha Narula, MIT Digital Currency Alternative, 15 July 2025)
Digital Dollars Will Pay Interest — By the Back Door ($) (Andy Mukherjee, Bloomberg, 15 July 2025)
Bitcoin Flourishes as the Ancien Régime Falls ($) (John Authers, Bloomberg, 14 July 2025)
Stablecoins in Africa (Part I) (Yoseph Ayele, LAVA Writing, 14 July 2025)
How Tether became money-launderers’ dream currency (£) (The Economist, 4 July 2025)
Stablecoin Giant Tether Is the ‘Genius Act’s Big Loser ($) (Alexander Osipovich, Vicky Ge Huang, and Angus Berwick, The Wall Street Journal, 25 June 2025)
Everything Is an ETF Now ($) (Matt Levine, Bloomberg, 24 June 2025)
Road to a $3.7 Trillion Stablecoin Market Is Full of Obstacles ($) (Emily Nicolle, Anna Irrera, and Emily Mason, Bloomberg, 18 June 2025)
Global Cross-Border Payments: A $1 Quadrillion Evolving Market? (Eugenio M Cerutti, Melih Firat, and Martina Hengge, International Monetary Fund, 13 June 2025)
Stablecoin Runs and the Centralization of Arbitrage (Yiming Ma, Yao Zeng, and Anthony Lee Zhang, NBER Working Paper Series, May 2025)
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