The Bank for International Settlements (BIS) has issued a scathing critique of stablecoins in its latest annual report, asserting that they fundamentally fail as a form of money. The report highlights stablecoins' inability to meet crucial criteria of singleness, elasticity, and integrity, advocating for stringent limitations on their use within the financial system.
Stablecoins Fall Short on Core Monetary Principles
The BIS report, titled "III. The next-generation monetary and financial system," argues that stablecoins, despite their promise of stability relative to fiat currencies, do not fulfill the essential characteristics of sound money. The report identifies three key tests:
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Singleness: Stablecoins often trade at varying exchange rates, undermining the principle that money should be accepted at par without question. Unlike central bank-backed money, which ensures uniform value, stablecoins are liabilities of specific issuers, leading to potential deviations based on issuer creditworthiness.
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Elasticity: Stablecoins lack the flexible supply mechanism inherent in modern banking systems. Their issuance typically requires full upfront payment, creating a "cash-in-advance" constraint that hinders their ability to meet large-value payment demands or absorb financial shocks, a function central banks provide.
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Integrity: The design of stablecoins, particularly their circulation on public blockchains via unhosted wallets, makes them susceptible to illicit activities such as money laundering, sanctions evasion, and terrorist financing. The absence of robust Know Your Customer (KYC) standards exacerbates these concerns.
The Illusion of Decentralization and Inherent Fragility
The BIS report also touches upon the "decentralization illusion" in decentralized finance (DeFi), noting that some level of centralization is inevitable due to governance needs and power concentration within blockchain consensus mechanisms. This inherent fragility, coupled with high leverage and liquidity mismatches, makes stablecoins prone to runs, similar to traditional money market funds. The report emphasizes that stablecoins are not true money substitutes as they lack the "no-questions-asked" status of central bank money.
Policy Implications and the Path Forward
While acknowledging the continued demand for stablecoins due to their cross-border accessibility and potential for lower transaction costs, the BIS advocates for a limited and well-regulated role for them. The report suggests that legitimate use cases should be channeled into the regulated monetary system without undermining financial stability. It stresses that central banks must lead the transformation towards a next-generation monetary system built on trusted foundations and technologically advanced, programmable infrastructures. This includes the tokenization of central bank reserves, commercial bank money, and government bonds on a unified ledger, which the BIS views as a more promising path for innovation.
Sources
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III. The next-generation monetary and financial system, Bank for International Settlements.
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DeFi risks and the decentralisation illusion, Bank for International Settlements.
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Stablecoins Fail Key Tests of Real Money, Cointelegraph.
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