The Bank for International Settlements has warned that stablecoins fail to meet the criteria for sound money and are unlikely to play a central role in the financial system of the future, amid rising interest in the digital asset type among major banks and backing from the US government.
In a chapter of its Annual Economic Report published on Tuesday, ahead of the report’s full release on June 29, the BIS said stablecoins fall short of the principles it considers fundamental to safe and scalable money and “perform badly” against the integrity test at the system level.
“It remains to be seen what part stablecoins will eventually play in the monetary system, besides being a gateway to the crypto ecosystem,” Hyun Song Shin, economic adviser and head of the BIS’s monetary and economic department, said in a call on Monday.
“They may have a subsidiary role to play, but they are unlikely to be the mainstay of the monetary system [because] they fall short on the three criteria of singleness, elasticity and integrity,” Shin said.
The BIS’s critique comes a week after the US Senate passed a landmark bill — dubbed the GENIUS Act (Regulation Tracker link) — to create a regulatory framework for US dollar-pegged stablecoins, as financial institutions move closer to issuing private stablecoins.
Earlier this month Société Générale’s integrated subsidiary SG Forge said it would launch a new stablecoin, the USD CoinVertible, with BNY as its reserve custodian.
Prominent fintech Fiserv announced plans on Monday to launch a new digital asset platform, including a new stablecoin — FIUSD — to be added to the fintech’s existing banking and payments infrastructure by the end of the year.
The BIS noted that stablecoins often rely on private issuers, lack settlement via central bank reserves, and are vulnerable to fluctuating valuations and regulatory arbitrage.
It also highlighted concerns about financial crime, citing limited know-your-customer procedures and the use of unhosted wallets that can bypass existing anti-money-laundering frameworks.
“While we do not know what place stablecoins are going to play in the future — what role and how important of a role — it is really difficult to see with those shortcomings that they can really become mainstream [in] the financial system,” Andréa Maechler, deputy general manager and acting head of BIS Innovation Hub, said in the call on Monday.
But circulating in the public blockchain means it is “essentially a part of the crypto ecosystem,” Shin said, and therefore “not possible to satisfy the same type of assurances on integrity and customer checks”.
The BIS’s concerns follow an EU report published last week which said US-backed stablecoins pose significant risks to financial stability.
Under existing policies, USD stablecoins “create severe risks for third countries, indirectly also affecting the EU”, it said.
Stablecoin market capitalisation currently exceeds $250bn, according to CoinDesk.
The BIS instead supports a model for a tokenised monetary system centred on a unified ledger. This approach would integrate tokenised central bank reserves, commercial bank money, and government bonds on programmable platforms.
As part of this initiative, Project Agorá, a joint experiment launched in April last year involving seven central banks and 43 financial institutions, has now entered its prototyping phase.
The project aims to improve the efficiency of cross-border payments through the tokenisation of wholesale central bank money and commercial bank deposits on programmable platforms.
All of the “major commercial banks that are currently active in the correspondent banking business” are involved in the project, Shin said on Monday.
The BIS will announce further updates on Project Agorá “fairly shortly”, Shin added, without disclosing a timeline.
“The BIS is not just theorising, it is working with central banks to test and develop tokenisation as the backbone of the future monetary and financial system,” said Maechler.
