Bank for International Settlements Criticizes Stablecoins’ Stability

The BIS report highlights significant risks posed by stablecoins, questioning their role in the future monetary system and emphasizing the necessity to address regulatory oversight to avoid potential financial instability.

The Bank for International Settlements

The report states that stablecoins fail essential tests for sound money, including singleness, elasticity, and integrity. Hyun Song Shin, BIS Economic Adviser, compared stablecoins to 19th-century U.S. private banknotes, noting their lack of traditional central bank settlement function and potential for varying exchange rates. The report suggests that stablecoins’ inability to maintain consistent value affects their reliability as a money substitute, stressing the need for robust regulations.

“Stablecoins, as digital bearer instruments, lack the traditional settlement function provided by a central bank with fiat money. They could only trade at varying exchange rates depending on the issuer. This undermines the no-questions-asked principle of central bank-issued money.” — Hyun Song Shin, Economic Adviser, BIS

Immediate effects of these findings could include increased regulatory scrutiny and pressure on stablecoin issuers to enhance transparency and resilience. The BIS’s stance may also influence future central bank digital currency discussions. Stablecoins like Tether have faced challenges due to market dominance and regulatory pressures, with Tether’s European market exit being a recent example. The report emphasizes risks like “fire sales” if stablecoin projects fail, referencing past events like TerraUSD’s collapse and its market contagion effects.

Financial institutions may alter their stablecoin strategies, while governments could intensify regulatory measures to safeguard financial stability. Further BIS collaboration with central banks on tokenization aims to build a stable digital finance foundation. Looking ahead, the report suggests that stablecoins could still attract demand as niche financial tools, but their systemic role remains ultimately questionable. This underscores calls for regulation aligning with robust privacy, security, and anti-money laundering standards to prevent comparable market issues.