BIS Warns Stablecoins Lack Key Traits for Reliable Currency

The Bank for International Settlements (BIS) has recently released a 38-page report that offers insights into the next generation of currency and financial systems, while also issuing a warning about the rising popularity of stablecoins. The report highlights that stablecoins fall short in three key areas: singularity, elasticity, and completeness, which are essential for a reliable monetary system.

According to the report, stablecoins lack the traditional settlement functions provided by central banks through fiat currencies. The principle of "unconditional acceptance" is crucial for a currency, meaning that the public and financial institutions must trust and accept the currency issued by the central bank without questioning its value or the issuer's credibility. Stablecoins, as digital bearers, are marked with the issuer's name, similar to private banknotes from the 19th century in the United States, and thus fail to meet this principle.

The report also points out that stablecoins lack the elasticity required for a robust monetary system. The issuers' balance sheets cannot be expanded at will, which limits their ability to adapt to changing economic conditions. Additionally, stablecoins have significant shortcomings in preventing illegal activities. The BIS emphasizes that due to the widespread availability of currency and payment methods, measures must be in place to prevent fraud, financial crimes, and the funding of illegal activities. Stablecoins, however, have major flaws in this regard.

The BIS concludes that stablecoins, in their current form, are not reliable enough to be considered a stable form of currency. Without proper regulation, they pose risks to financial stability and monetary sovereignty. The report underscores the need for stringent regulation and oversight to mitigate these risks and ensure that stablecoins do not undermine the stability of the financial system.

The BIS suggests that central banks should consider developing their own digital currencies as a more reliable and secure alternative to stablecoins. This would provide the necessary trust and stability that stablecoins currently lack. The report also highlights the importance of international cooperation in addressing the global implications of stablecoins and ensuring that they do not pose a threat to the financial system.

In summary, the BIS report serves as a cautionary note for policymakers and financial institutions, urging them to carefully consider the risks associated with stablecoins and to take proactive measures to safeguard financial stability and monetary sovereignty. The report underscores the importance of regulation and international cooperation in managing the challenges posed by stablecoins and in promoting the development of more reliable digital currencies.