BIS has rejected the possibility of stablecoins acting as money

What’s new? The Bank for International Settlements (BIS) has said in a new report that fiat-pegged stablecoins fail to meet three key criteria that would allow them to act as the foundation of a monetary system: singleness, elasticity, and integrity.

BIS report

What else is known?

“It remains to be seen what role innovations like stablecoins will play in the future monetary system. They do offer novel programmability functions, easy access for new users and pseudonymity features. But stablecoins do not stack up well against the three desirable characteristics of sound monetary arrangements and thus cannot be the mainstay of the future monetary system,” the BIS authors wrote in an annual report exploring next-generation finance.

Stablecoins do offer some advantages, the authors said, such as programmability and easy access for new users. They can also provide lower costs and faster transaction speeds, especially for cross-border payments.

However, when compared to gold standard central bank issuances and instruments issued by commercial banks and other private sector entities, stablecoins can pose risks to the global financial system by undermining state monetary sovereignty (sometimes through “hidden dollarization”) as well as facilitating crime, the authors argue.

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While stablecoins are important as a means of entering and withdrawing funds from the crypto ecosystem, as well as a hedge in countries with high inflation and limited access to banking services, these assets should not be treated as cash.

The authors of the report write that stablecoins fail the elasticity test because of their design. Because such assets are backed by a “nominally equivalent amount of assets,” any “additional issuance requires full upfront payment by holders,” which imposes restrictions.

Also, unlike central bank reserves, stablecoins lack singleness, where money can be issued by different banks and accepted by all without hesitation. Because stablecoins are issued by organizations that may set different standards and may not always use the same settlement guarantees.

Stablecoins also have “significant shortcomings when it comes to promoting the integrity of the monetary system,” as not all issuers will follow standardized KYC/AML guidelines or protect against financial crime.

However, the BIS remains optimistic about the potential for tokenization to transform cross-border payments and securities markets:

“Tokenised platforms with central bank reserves, commercial bank money and government bonds at the centre can lay the groundwork for the next-generation monetary and financial system.”