Stablecoins Lack Fiat Money’s Settlement Function: BIS Warns of Financial Risks
The Bank for International Settlements (BIS) has issued a stark warning about stablecoins, stating they "perform poorly" as money due to their lack of central bank backing, insufficient safeguards against illicit use, and inability to support lending. In its 2025 Annual Economic Report, the BIS highlights concerns over monetary sovereignty, transparency, and capital flight risks. Hyun Shin, BIS Economic Advisor, compares stablecoins to 19th-century private banknotes, emphasizing their instability without central bank settlement functions. The report calls for bold action to integrate tokenized central bank reserves into a unified ledger system, ensuring stability in the next-generation financial ecosystem.
Why Do Stablecoins Fail as Reliable Money?
The BIS evaluated stablecoins against three key criteria: stability, elasticity, and integrity—and found them lacking in all areas. Unlike fiat currencies backed by central banks, stablecoins rely on private issuers whose reserves may be opaque or unstable. For instance, the collapse of TerraUSD (UST) in 2022 demonstrated how rapid "fire sales" of backing assets can destabilize the entire system. The BIS also notes that stablecoins often bypass "know-your-customer" (KYC) protocols, making them attractive for criminal activities. Without regulation, they pose systemic risks to financial stability and national monetary control.
How Do Stablecoins Threaten Monetary Sovereignty?
Andrea Maechler, Deputy General Manager of the BIS, raises critical questions about who controls stablecoin reserves: "Is the money really there? Where is it?" The dominance of stablecoins like Tether (USDT)—which exited the EU market due to regulatory clashes—could undermine smaller economies by enabling capital flight. Agustin Carstens, outgoing BIS chief, warns that unchecked stablecoin adoption might erode trust in sovereign currencies, especially in emerging markets. The BIS advocates for a tokenized system where central bank money remains the primary global payment medium, integrated with commercial bank deposits and government bonds.
What Solutions Does the BIS Propose?
The BIS envisions a "unified programmable ledger" combining tokenized central bank reserves, commercial bank money, and government bonds. This hybrid system WOULD preserve trust while enabling innovations like collateral management and cross-border payments. Visa and Mastercard are already testing stablecoin integrations (e.g., USDC settlements), and Stripe plans to offer USDC as a payment option for Shopify merchants. However, Carstens stresses that bold regulatory action is needed to govern ledger platforms and prevent fragmentation of monetary control across nations.
Can Stablecoins Coexist with Traditional Finance?
While stablecoins show promise for consumer payments—as seen in partnerships with Visa and Mastercard—their long-term role remains uncertain. The BIS suggests they may only play a "subsidiary" role unless backed by robust oversight. Tokenized central bank reserves could provide a stable settlement layer, while commercial bank-issued tokens might offer flexibility within a trusted two-tier system. The key challenge lies in balancing innovation with financial integrity, ensuring stablecoins don’t repeat the failures of private banknotes from centuries past.
FAQs: Stablecoins and the Future of Money
Why are stablecoins considered risky?
Stablecoins lack central bank backing and transparency in reserves, making them vulnerable to collapses like TerraUSD. They also facilitate illicit activities due to weak KYC controls.
How could tokenized government bonds improve finance?
Tokenized bonds would enhance liquidity for collateral and monetary operations, integrating seamlessly with programmable ledgers for faster settlements.
What’s the BIS’s stance on private stablecoin issuers?
The BIS warns that private issuers cannot replicate the trust and elasticity of central bank money, advocating for a regulated, hybrid system instead.
