Why Stablecoins Fail as Fiat Money: BIS Report Exposes Critical Shortcomings
A groundbreaking 2025 BIS report reveals stablecoins' systemic failures in meeting Core monetary functions—liquidity, elasticity, and integrity. Despite integration attempts by payment giants like Visa, these digital bearer instruments lack central bank settlement capabilities, pose criminal misuse risks, and threaten monetary sovereignty. The report advocates for tokenized central bank reserves as the future foundation for programmable finance.
The Three Fundamental Failures of Stablecoins
According to the Bank for International Settlements' unpublished annual economic report, stablecoins performed "poorly" across all three tests of viable money:
- Singularity: Unlike central bank money that trades at par, stablecoins suffer from variable exchange rates depending on the issuer—reminiscent of unstable private banknotes in 19th-century America.
- Elasticity: They cannot facilitate credit creation through fractional reserve banking, limiting their economic utility.
- Integrity: Most lack robust KYC/AML controls, making them preferred vehicles for criminal transactions.
Monetary Sovereignty Under Threat
Hyun Shin, BIS Economic Advisor, compared stablecoins to the "wildcat banking" era, noting their inability to provide risk-free settlement finality. The report highlights specific dangers:
- Fire Sales: A collapse like TerraUSD in 2022 could trigger mass sell-offs of reserve assets
- Capital Flight: Emerging economies face destabilizing outflows
- Opacity: Tether's recurring transparency issues exemplify systemic risks
The Tokenized Future: Unified Ledger Vision
BIS proposes a hybrid system combining blockchain efficiency with central bank trust:
| Component | Function |
|---|---|
| Tokenized CBDC | Settlement asset for wholesale transactions |
| Commercial Bank Money | Two-tier system preserving stability |
| Government Securities | Enhanced liquidity for monetary operations |
Corporate Adoption: Visa's USDC Experiment
Despite criticisms, payment processors are advancing stablecoin integration:
- Visa settled $10B in USDC transactions in 2024
- Mastercard testing cross-border blockchain payments
- Stripe enabling Shopify merchants to accept USDC
Frequently Asked Questions
Why can't stablecoins replace fiat money?
They lack central bank backing, elastic credit creation capabilities, and universal acceptance at par value—three essential characteristics of sovereign money.
What happened during the TerraUSD collapse?
The algorithmic stablecoin's death spiral in May 2022 wiped out $40B in value, demonstrating the fragility of non-CBDC models.
How might central banks use tokenization?
BIS envisions programmable ledgers combining CBDCs, bank deposits, and government securities to enable "atomic settlement" of complex transactions.
