“Stablecoins perform poorly when assessed against the three tests for serving as the mainstay of the monetary system,” the report said.
For one, they are widely used in illicit activity due to the anonymity of transactions and the lack of know-your-client standards, “raising concerns about their use for financial crime, such as money laundering and terrorism financing.”
“While demand for stablecoins may persist, they perform badly against the integrity test at the system level,” the report said.
At the same time, they also fare poorly on other tests for stability and utility.
For instance, stablecoins often trade at varying exchange rates, not directly at par, and they “lack the settlement function provided by the central bank,” the report said. As a result, stablecoins “are also unable to fulfil the no-questions-asked principle of bank-issued money.”
Moreover, the structure of stablecoins — which are typically fully backed by equivalent assets — faces constraints that prevent their efficient use in large-volume transactions.
“Stablecoins raise a number of other concerns,” the report said. “For one, there is an inherent tension between their promise to always deliver par convertibility (i.e., be truly stable) and the need for a profitable business model that involves liquidity or credit risk.”
Additionally, the report said the potential loss of monetary sovereignty and capital flight “are major concerns,” particularly in emerging markets.
“If stablecoins continue to grow, they could pose financial stability risks, including the tail risk of fire sales of safe assets,” it said. “Finally, bank-issued stablecoins may introduce new risks, depending on their legal and governance arrangements.”
Ultimately, the future for stablecoins is in a secondary role within the global financial system, the report concluded.
Lessons of history
“Society has a choice. The monetary system can transform into a next-generation system built on tried and tested foundations of trust and technologically superior, programmable infrastructures. Or society can relearn the historical lessons about the limitations of unsound money, with real societal costs, by taking a detour involving private digital currencies that fail the triple test of singleness, elasticity and integrity,” it said.
Central banks and other policymakers need to take a leadership role to “push the financial system along the right path, in partnership with the financial sector,” it concluded.
That path includes incorporating the potential advantages of tokenization into the existing financial system, it suggested.
“Central bank leadership is essential to unlocking the full potential of tokenized systems safely, efficiently and inclusively,” it said.
In particular, it called on central banks to outline a vision for replicating the strengths of the existing financial system in a tokenized ecosystem, to develop the required legal and regulatory frameworks for the development and adoption of tokenized finance, and to provide the basic assets and platforms needed for a tokenized financial system.
“Most importantly, such a system will require settlement in a tokenized form of central bank reserves,” it said.
