BIS report pours cold water on stablecoin hype
They may be the current darling of the financial services world, but stablecoins fall short as a form of sound money and at best may "eventually play a subsidiary role in the hinterland of the financial system," according to the Bank for International Settlement.
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Stablecoins have seen a surge in interest in recent months, with US regulators paving the way for adoption. big banks exploring rolling out their own tokens, USDC issuer Circle soaring on its market debut, and Citi predicting that the market will hit trillions within five years.
Yet, while offering some promise on tokenisation, they are fundamentally flawed, says a report into the next generation monetary and financial system from the BIS, because they "do not stack up well against the three desirable characteristics of sound monetary arrangements and thus cannot be the mainstay of the future monetary system".
These characteristics are the ability to deliver singleness of money (acceptance for payment at par), elasticity (timely discharge of obligations, preventing gridlock) and integrity (safeguarding against financial crime).
Therefore, "besides acting as a gateway to the crypto ecosystem, their future role is unclear," says the report. In fact, without regulation they could be actively damaging, posing a risk to financial stability and monetary sovereignty.
The BIS instead predicts that a tokenised unified ledger incorporating central bank money, commercial bank deposits and government bonds will lay the foundations of a tokenised monetary and financial system based on the time-tested principles of sound money.
This trilogy can boost efficiency and open new possibilities in cross-border payments, securities markets and beyond, while maintaining the key principles of sound money that stablecoins fail in: singleness, elasticity and integrity.
Hyun Song Shin, head, monetary and economic department, says: "Tokenisation of deposits and central bank money means that both the primary means of payment as well as the settlement function of central bank money can be integrated seamlessly on the same programmable platform. It has the potential to transform securities markets and its application to correspondent banking is especially promising."
The BIS is already exploring this through Project Agorá, a collaboration led by the group with seven central banks and 43 private sector institutions to "test and develop tokenisation as the backbone of the future monetary and financial system," says Andréa M Maechler, acting head, BIS Innovation Hub.
Read the report.
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