Stablecoins threaten global financial stability, central banks warn

Times

17 hours ago

The growing use of stablecoins threatens global financial stability and the monetary sovereignty of countries, the Bank for International Settlements has warned, in a rebuke of US policy supporting the adoption of the digital assets.
Known as the 'central bank of central banks', the BIS issued a pointed criticism of stablecoins, which are a form of digital currency pegged to traditional assets such as the dollar or commodities.
It said stablecoins had 'some attributes of money' but warned that they 'perform poorly when assessed against the three tests for serving as the mainstay of the monetary system'.
'Stablecoins as a form of sound money fall short and without regulation pose a risk to financial stability and monetary sovereignty,' it said.
The BIS's intervention comes after the US Senate passed a bill known as the 'Genius Act' that would create a legal framework for the digital assets and require them to be backed by liquid assets such as the dollar or US government bonds.
The BIS said the main pitfall of stablecoins was their failure to meet the test of monetary 'singleness', where the value of one asset is always guaranteed as it is with dollars or the pound, which are underwritten by their issuing central banks.
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Stablecoins are generally considered safer and less volatile than cryptocurrencies such as bitcoin but the sector was thrown into turmoil with the collapsing value of terraUSD in 2022. Terra, which was pegged one-to-one with the US dollar, had about $50 billion of its market capitalisation wiped out.
As part of its latest annual report to be published this week, the BIS said: '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 re-learn the historical lessons about the limitations of unsound money, with real societal costs, by taking a detour involving private digital currencies. If stablecoins continue
to grow they could pose financial stability risks, including the tail risk of fire sales of
safe assets.'
The BIS instead urged central banks to tokenise their currencies to counter the threat of stablecoins. The bank is working with seven big central banks — including the Bank of England, US Federal Reserve, Bank of France and Bank of Japan — and a number of commercial banks to help to create a network of tokenised central bank payments, known as Project Agora.