By Daniel Kuhn
Compiled by: far, Centreless
The Bank for International Settlements says stablecoins are not currencies.
The institution, sometimes called the “central bank’s central bank,” said in a report released Tuesday that digital assets pegged to fiat currencies fail the “three key tests” needed to make them the backbone of a monetary system: singleness, resilience and integrity.
“It remains to be seen what role innovations such as stablecoins will play in the future monetary system,” the BIS said in its annual report examining next-generation finance. “But they do not measure up well on the three desirable features of sound monetary arrangements and therefore cannot serve as the backbone of the future monetary system.”
According to the report’s authors, stablecoins do have some advantages — such as programmability, pseudo-anonymity, and “friendly onboarding for new users.” In addition, their “technical characteristics mean they may offer lower costs and faster transaction speeds,” especially for cross-border payments.
However, compared with central bank-issued currencies and instruments issued by commercial banks and other private sector entities, stablecoins could pose risks to the global financial system by undermining governments’ monetary sovereignty (sometimes through “hidden dollarization”) and facilitating criminal activity, the authors say.
While stablecoins have a clear role in on-ramps and off-ramps of the crypto ecosystem and are growing in popularity in countries with high inflation, capital controls, or limited access to U.S. dollar accounts, these assets should not be treated like cash.
Three key tests
Specifically, stablecoins fail resilience tests due to their structural design. Take USDT issued by Tether as an example. This stablecoin is backed by “assets of nominally equivalent value” and any “additional issuance requires full prepayment by the holder”, which imposes a “pre-cash constraint”.
Furthermore, unlike central bank reserves, stablecoins do not meet the “singleness” requirement of money — that is, money can be issued by different banks and accepted unconditionally by everyone — because they are typically issued by centralized entities that may set different standards and do not always provide the same settlement guarantees.
“Stablecoin holders are marked with the name of the issuer, just like the private banknotes that circulated in the free banking era of the United States in the 19th century,” the authors wrote. “As a result, stablecoins are often traded at different exchange rates, undermining the singularity of the currency.”
For similar reasons, stablecoins also have "significant flaws" in promoting the integrity of the monetary system, as not all issuers follow standardized know-your-customer (KYC) and anti-money laundering (AML) guidelines and cannot effectively prevent financial crime.
Transformative Tokenization
Circle, the issuer of the stablecoin USDC, saw its shares fall more than 15% on Tuesday following the release of the BIS report. The day before, CRCL stock hit an all-time high of $299, up more than 600% from its initial public offering price of about $32.
Despite the concerns expressed by the BIS, the organization remains bullish on the potential of tokenization, seeing it as a “revolutionary innovation” in areas ranging from cross-border payments to securities markets.
“A tokenized platform with central bank reserves, commercial bank money, and government bonds at its core could lay the foundation for the next generation of monetary and financial systems,” the authors wrote.
