More financial institutions engaging in cryptocurrencies or digital assets as a means of payment could lead to a "spillover to the overall economy," the European Central Bank wrote in a report Tuesday.
Regulators have been grappling with the devastating collapse of Terra blockchain coins, which has called into question the stability of algorithmic stablecoins like UST that are not backed by a fiat currency.
"Given the speed of crypto developments and the increasing risks, it is important to urgently bring crypto assets within the regulatory framework and under supervision," the ECB said.
The European Union is currently working on legislation to regulate cryptocurrencies, known as the Markets in Crypto Assets package.
European Central Bank officials have previously highlighted the risks of cryptocurrencies. The bank's president, Christine Lagarde, recently said that cryptocurrencies have posed a threat in the past and still do.