Germany and Italy have proposed sweeping new measures to regulate global stablecoins within the European Union, including a mechanism that would allow authorities to shut down certain digital currencies if they pose risks to financial stability. The proposal, outlined in a joint policy paper, seeks to strengthen oversight of stablecoins—cryptocurrencies typically pegged to fiat currencies such as the euro or U.S. dollar—by introducing stricter requirements for operators based outside the EU.
At the centre of the proposal is a so-called “kill switch,” which would empower the European Banking Authority to ban a stablecoin from operating within the bloc under specific conditions. These include failures in reserve transfer mechanisms, serious regulatory breaches, or actions deemed harmful to EU users.
The move reflects growing concern among European policymakers about the risks posed by cross-border stablecoin structures, particularly those issued across multiple jurisdictions with reserves split between them.
Under the proposed framework, stablecoin operators from outside the EU would only be allowed to operate within the bloc if their home country’s regulatory system is deemed equivalent to EU standards. Without such recognition, access to the European market could be denied.
Although no specific companies are named, the proposal is widely seen as targeting major dollar-backed stablecoins, many of which are headquartered outside Europe.
The initiative is being driven by the need to safeguard financial stability and strengthen the EU’s economic sovereignty. Policymakers are increasingly concerned that weaknesses in cross-border reserve arrangements could lead to liquidity shortfalls during periods of market stress.
For example, if a stablecoin’s backing reserves are held across different jurisdictions, there is a risk that funds may not be immediately accessible to EU users in times of high demand, potentially triggering instability similar to a bank run.
The proposal also calls for tighter supervision of large stablecoin issuers. Companies operating cross-border issuance models could automatically be classified as “significant,” placing them under direct regulatory oversight regardless of their size.
This would build on the EU’s existing regulatory framework under Markets in Crypto-Assets Regulation, which already requires stablecoin issuers to maintain reserves and meet governance standards.
The urgency behind the proposal is reinforced by warnings from the European Systemic Risk Board, which has flagged multi-issuer stablecoins as a potential threat to financial stability.
Germany and Italy are pushing for these safeguards to be incorporated into ongoing EU legislative discussions, arguing that the rapid growth of digital assets requires proactive regulation.
While the proposal does not yet represent an official EU-wide position, its backing by two of the eurozone’s largest economies suggests it could play a significant role in shaping future policy.
As the global stablecoin market continues to expand, Europe’s approach signals a shift toward tighter control and increased scrutiny of digital financial systems operating within its borders.
