Germany and Italy have proposed a sweeping new regulatory framework within the European Union aimed at tightening oversight of global stablecoins, introducing what officials describe as a potential “kill switch” mechanism that would allow regulators to block or ban certain digital assets from operating within the bloc.
The proposal, outlined in a joint policy document circulated ahead of EU financial discussions, reflects growing concern among European policymakers about the risks posed by cross-border stablecoins, particularly those issued outside the EU. According to details from the document, the initiative seeks to ensure financial stability, protect consumers, and reinforce the EU’s economic sovereignty in an increasingly digital financial landscape.
Stablecoins, a type of cryptocurrency typically pegged to traditional currencies such as the US dollar or euro, have become a major component of the global digital finance ecosystem. However, regulators in Europe are increasingly wary of their structure, especially multi-jurisdictional models where reserves backing the coins are split across different countries.
Germany and Italy argue that such arrangements could expose the EU to significant financial risks. In a crisis scenario, if large numbers of EU users attempt to redeem their holdings at the same time, there is no guarantee that sufficient reserves held outside the bloc could be accessed quickly enough to meet demand. This could trigger liquidity shortfalls similar to bank runs, potentially destabilising financial markets.
At the centre of the proposal is the so-called “kill switch,” a mechanism that would empower regulators, particularly the European Banking Authority, to immediately suspend or ban a stablecoin from operating within the EU under certain conditions. These conditions include failures in reserve transfer mechanisms, breaches of regulatory requirements, or actions deemed harmful to EU consumers.
In practical terms, this means that any global stablecoin issuer would need to demonstrate that its reserve assets can be transferred seamlessly across borders into the EU at any time, especially during periods of financial stress. If this requirement cannot be met, the stablecoin could be shut out of the European market entirely.
The proposal also introduces stricter entry conditions for foreign stablecoin operators. Under the framework, companies based outside the EU would only be allowed to offer their services if their home country’s regulatory regime is deemed equivalent to EU standards. Without such recognition, access to the EU market would be denied.
This aspect of the plan is widely seen as targeting major dollar-backed stablecoins, most of which are issued by companies headquartered in the United States. Given the current differences between US and EU regulatory approaches to digital assets, the proposal could effectively exclude some of the world’s largest stablecoin operators from the European market.
The urgency behind the initiative is partly driven by warnings from the European Systemic Risk Board, which has flagged multi-issuer stablecoin structures as a potential threat to financial stability. The board has called for stronger safeguards to be implemented by the end of 2026, with further measures to follow by 2027.
Germany and Italy are pushing for these safeguards to be embedded into ongoing negotiations around the EU’s Market Integration and Supervision Package, arguing that delays could leave the bloc exposed as global adoption of digital currencies accelerates.
The proposal also seeks to expand the scope of regulatory oversight by classifying cross-border stablecoin schemes as inherently “significant,” regardless of their size. This would place them under direct supervision from EU authorities from the outset, rather than waiting until they reach a certain scale.
While the plan does not yet represent an official EU position, policy experts note that proposals backed by major economies such as Germany and Italy often carry significant influence in shaping final legislation.
The move highlights a broader shift in Europe’s approach to digital finance, where the focus is increasingly moving beyond innovation to issues of control, resilience, and geopolitical independence. As stablecoins continue to gain traction globally, the EU appears determined to ensure that their growth does not come at the expense of financial stability or regulatory authority.
