The BIS indicates that digital assets pegged to fiat currencies have failed to pass the "three key tests" required to become a pillar of the monetary system: uniqueness, resilience, and integrity.
Written by: Daniel Kuhn
Translated by: far, Centreless
The Bank for International Settlements states that stablecoins are not money.
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 currencies have failed to pass the "three key tests" required to become a pillar of the monetary system: uniqueness, resilience, and integrity.
In its annual report reviewing the next generation of finance, the BIS stated: "What role innovations like stablecoins will play in the future monetary system remains to be seen. However, they perform poorly against the three ideal characteristics that sound monetary arrangements should possess, and therefore cannot become pillars 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 methods for new users." Additionally, their "technical characteristics mean they may offer lower costs and faster transaction speeds," especially in cross-border payments.
However, compared to currencies issued by central banks and instruments 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 "covert dollarization") and facilitating criminal activities, the authors stated.
Despite stablecoins having a clear role as gateways in and out of the crypto ecosystem and becoming increasingly popular in countries with high inflation, capital controls, or difficulty accessing dollar accounts, these assets should not be treated as cash.
Three Key Tests
Specifically, due to their structural design, stablecoins have failed the resilience test. Taking Tether's USDT as an example, this stablecoin is backed by "nominally equivalent assets," and any "additional issuance requires full prepayment from holders," which imposes a "prepayment constraint."
Moreover, unlike central bank reserves, stablecoins do not meet the "uniqueness" requirement of money—meaning that 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 necessarily always provide the same settlement guarantees.
The authors wrote: "Holders of stablecoins will label the name of the issuer, much like the private banknotes that circulated during the 19th-century American free banking era. Therefore, stablecoins often trade at different exchange rates, undermining the uniqueness of money."
For similar reasons, stablecoins also have "significant flaws" in promoting the integrity of the monetary system, as not all issuers adhere to standardized Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines, nor can they effectively prevent financial crimes.
Transformative Tokenization
The issuer of stablecoin USDC, Circle, saw its stock price drop more than 15% on Tuesday following the release of the BIS report. The day before, CRCL stock had reached an all-time high of $299, up over 600% from its initial public offering price of about $32.
Despite the concerns expressed by the BIS, 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."
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