BIS Report Criticizes Stablecoins for Lacking Key Monetary Qualities

The Bank for International Settlements (BIS) has released its annual report, criticizing stablecoins for failing to meet the essential criteria for a robust monetary system. The report highlights that stablecoins do not possess the three core qualities of sound money: singleness, elasticity, and integrity. These qualities are crucial for maintaining monetary sovereignty and financial stability.

The BIS report elaborates on why stablecoins fall short in these areas. Elasticity, the ability to adjust the money supply dynamically, is a significant concern. Most stablecoins, such as USDT, require full backing before issuance, which limits their flexibility. This "cash-in-advance" model contrasts with central bank money, which can expand or contract supply as needed. Singleness, the interchangeability of money issued by different institutions, is another issue. Stablecoins are often issuer-specific and trade at different values based on trust and backing, similar to private banknotes in the 19th-century U.S. Integrity, the resilience against financial crime, is also compromised. Not all stablecoin issuers apply consistent anti-money laundering (AML) or know-your-customer (KYC) standards, undermining the security and legal uniformity required in national monetary systems.

Despite these shortcomings, the BIS acknowledges the utility of stablecoins in offering fast payments, programmability, and accessibility, especially in regions with capital restrictions or high inflation. However, these benefits do not qualify them as substitutes for traditional money, given the risks of regulatory fragmentation and financial crime. The BIS sees tokenization of central bank reserves, commercial bank money, and government bonds as a transformative opportunity. This approach could build a next-generation financial system that combines digital innovation with institutional trust, ensuring the singleness of money and enabling monetary policy implementation on a tokenized platform.

The BIS envisions a future where tokenized central bank reserves provide a stable and trusted settlement asset, while tokenized commercial bank money offers new functionalities while preserving trust and stability. Tokenized government bonds would enhance liquidity and support various financial transactions. The BIS calls for bold action by central banks and other public authorities to drive this transformation, ensuring that legitimate use cases are appropriately regulated and that illicit use is blocked to protect the monetary and financial system. The role of stablecoins in this future remains uncertain, but their poor performance on the three tests suggests they may at best serve a subsidiary role.