The Bank for International Settlements states that stablecoins are not currency.
This institution, sometimes referred to as the "central bank of central banks," noted in a report released on Tuesday that digital assets pegged to fiat currency failed to pass the "three key tests" required to make them a pillar of the monetary system: unity, resilience, and completeness.
BIS, while reviewing the next generation of finance in its annual report, stated: "It remains to be seen what role innovations like stablecoins will play in the future monetary system. However, they perform poorly when measuring the three ideal characteristics of sound monetary arrangements, and therefore cannot become a pillar of the future monetary system."
According to the report's authors, stablecoins do have some advantages—such as programmability, pseudo-anonymity, and "user-friendly access". Moreover, their "technical characteristics suggest they may offer lower costs and faster transaction speeds", especially in cross-border payments.
However, compared to currencies issued by central banks and tools issued by commercial banks and other private sector entities, stablecoins may pose risks to the global financial system by undermining government monetary sovereignty (sometimes through "hidden dollarization") and fostering criminal activities, the authors said.
Despite stablecoins having a clear role in entry and exit channels of the crypto ecosystem and becoming increasingly popular in countries with high inflation, capital controls, or difficulty obtaining dollar accounts, these assets should not be treated as cash.
Three Key Tests
Specifically, due to their structural design, stablecoins fail the resilience test. Taking Tether's USDT as an example, this stablecoin is backed by "nominally equivalent assets", with any "additional issuance requiring full prepayment by holders", imposing a "prepaid constraint".
Furthermore, unlike central bank reserves, stablecoins do not meet the "unity" requirement of currency—that currency can be issued by different banks and unconditionally accepted by everyone—because they are typically issued by centralized entities that may set different standards and do not necessarily always provide the same settlement guarantees.
The authors wrote: "Stablecoin holders will note the issuer's name, just like private bank notes circulating during the Free Banking era in the 19th-century United States. Therefore, stablecoins are often traded at different exchange rates, undermining the unity of currency."
For similar reasons, stablecoins have "significant flaws" in promoting the completeness of the monetary system, as not all issuers follow standardized Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines, nor can they effectively prevent financial crimes.
Transformative Tokenization
Circle, the issuer of stablecoin USDC, saw its stock price drop over 15% on Tuesday following the BIS report. The day before, CRCL stock had hit a historic high of $299, rising over 600% from its initial public offering price of around $32.
Despite expressing concerns, the organization remains optimistic about the potential of tokenization, viewing it as a "revolutionary innovation" across areas from cross-border payments to securities markets.
The authors wrote: "A tokenization platform centered on central bank reserves, commercial bank money, and government bonds can lay the foundation for the next generation of monetary and financial systems."
