🌐 Stablecoins ‘Perform Poorly’ as Money, Central Banks Warn
The Bank for International Settlements (BIS) has issued a strong warning in its latest report: stablecoins—despite their rapid adoption—fail three fundamental criteria of sound money: singleness, elasticity, and integrity. According to the BIS, these digital currencies lack true backing by central banks, insufficient AML/KYC controls, and the ability to expand money supply through lending—raising concerns over financial stability and sovereignty.
📉 Rising Circulation, Rising Risks
- Market presence: There are about $250–260 billion worth of stablecoins in circulation, predominantly USD‑pegged tokens like Tether (USDT) and USDC.
- Volatility issues: Despite their “stable” claim, these coins frequently deviate from their peg, undermining their usability for seamless payments.
- Institutional fragility: Requiring full backing means no credit creation—making them inflexible in times of high demand .
⚠️ Integrity & Illicit Use
Stablecoins are considered a weak link in combating financial crime:
- Low trust safeguards: Most lack robust AML/KYC checks, making them popular for illicit purposes such as money laundering and dark‑market transactions.
- Risk of sudden withdrawals: BIS economist Hyun Song Shin warned about the dangers of a rapid loss of confidence leading to massive redemptions—mirroring past crypto collapses.
🏦 Sovereignty & Systemic Concerns
- Monetary sovereignty threatened: Particularly in emerging markets, private stablecoins could erode local control over monetary policy and trigger capital flight.
- Entrenched system risk: According to Reuters, the BIS compares stablecoins to 19th-century private banknotes—unregulated, fragmented, and volatile.
🏗️ BIS’s Proposed Blueprint: Tokenised Unified Ledger
Rather than relying on unstable private solutions, the BIS advocates for a central bank–backed token solution:
- Tokenised central bank reserves
- Tokenised commercial bank deposits
- Tokenised government bonds
This unified ledger aims to maintain singleness, elasticity, and integrity, while enhancing cross-border payments and transparency.
Project Agorá, involving seven central banks and 43 institutions, is already piloting these concepts to build a next-generation monetary infrastructure .
🌍 Regulatory & Global Context
- US & UK responses: Both countries are drafting stablecoin regulations, including the U.S. “Genius Act,” while BIS urges deeper scrutiny.
- ECB digital euro push: ECB President Christine Lagarde supports fast-tracking the digital euro to counter stablecoin influence, stressing financial sovereignty.
- Regional instability: Brazil’s central bank recently cautioned that stablecoins fuel short-term capital flow volatility, complicating monetary policy.
🔍 What to Monitor
- June 29: Full BIS Annual Economic Report release—details on stablecoin analysis and central bank initiatives.
- Regulation timeline: Updates on U.S. Senate/House votes for stablecoin frameworks.
- ECB digital euro law: Focus on EU legislative acceleration and central bank-issued digital currencies.
🧭 Final Takeaway
Stablecoins have gained traction as crypto intermediaries, but central banks are not sold on their potential as pillars of modern finance. The BIS clearly states they underperform vital monetary functions and pose systemic risks. The proposed alternative—central bank–issued tokenised money—suggests a future built on trust, regulatory rigor, and innovation.