Christine Lagarde, president of the European Central Bank and chair of the European Systemic Risk Board (ESRB), warned that stablecoins were “reintroducing old risks through the back door” and urged policymakers to tighten safeguards before a crisis emerges.

Speaking at the ESRB’s ninth annual conference in Frankfurt on Wednesday 3 September 2025, Lagarde compared financial risk to sonar signals in a noisy ocean, arguing that regulators must learn to distinguish enduring dangers from background complexity. “Financial crises are a hardy perennial,” she said, quoting the late economic historian Charles Kindleberger.

Stablecoins under scrutiny

Lagarde cautioned that stablecoins, though presented as novel digital instruments, replicated well-known vulnerabilities. “At first sight, these entities and activities may seem novel. But we do not need to wait for them to mature to realise that they are reintroducing old risks through the back door,” she warned.

Liquidity risk was the most evident concern, Lagarde argued. She compared stablecoins promising redemption at par value with money market funds, which have long posed challenges in times of stress. The ESRB has already “been sounding the alarm on certain types of money market funds”, she noted, adding that stablecoins could trigger similar runs if reserves proved inadequate.

Gaps in EU regulation

While the EU’s new Markets in Crypto-Assets Regulation (MiCAR) aims to mitigate risks by requiring redemption at par and mandating that issuers hold reserves in bank deposits, Lagarde warned that regulatory gaps persist.

She highlighted “multi-issuance” structures, where both EU and non-EU entities issue the same stablecoin. “In such cases, MiCAR requirements do not extend to the non-EU issuer,” she clarified. If redemptions surged, investors would favour the EU issuer, where safeguards were stronger and fees prohibited, but reserves might be insufficient to meet concentrated demand.

Lagarde said these schemes replicated the risks of liquidity mismanagement seen in banking groups before global regulators enforced consolidation-level safeguards. “We know the dangers. And we do not need to wait for a crisis to prevent them,” she said.

Call for international coordination

Lagarde urged European legislators to act swiftly. “European legislation should ensure that such schemes cannot operate in the EU unless supported by robust equivalence regimes in other jurisdictions and safeguards relating to the transfer of assets between the EU and non-EU entities,” she said, stressing that international cooperation was “indispensable” to avoid risks flowing to less regulated jurisdictions.

Broader financial risks

Beyond crypto, Lagarde observed that Europe’s financial system was increasingly dominated by non-bank institutions, now equivalent to 3.8 times GDP compared with 3.1 times in the US. She warned that traditional distinctions between banks and non-banks were blurring, complicating oversight.

Nevertheless, she insisted that the underlying risks--credit, market, liquidity, underwriting and operational--remained unchanged. “Our task is to cut through the noise of novelty while remaining anchored in the perennial principles of good risk management, supervision, and effective policy,” Lagarde said. Concluding her remarks, she expressed confidence that institutions such as the ESRB could adapt to change while preserving stability.