Why Stablecoins Lack the Settlement Function of Fiat Money: Central Banks Sound the Alarm

In a damning assessment, top central bankers have declared that stablecoins perform "poorly" as money, despite growing political pressure to integrate them into mainstream finance. The Bank for International Settlements (BIS) concludes that stablecoins fail all three key tests of money: lacking central bank backing, adequate safeguards against illegal use, and the financial flexibility to generate credit. This revelation comes as the BIS prepares to release its annual economic report on June 28, 2025, which suggests stablecoins may only play a niche role at best. The report highlights serious concerns about stablecoins being used to circumvent financial integrity measures, undermining monetary sovereignty, and creating risks of capital flight from emerging markets.

Why Do Stablecoins Fail as Reliable Money?

The BIS analysis identifies three fundamental failures of stablecoins as monetary instruments. First, they lack the backing and trust of central banks that gives fiat currency its universal acceptance. Second, most stablecoin systems don't have sufficient safeguards against money laundering and other illegal activities that traditional finance combats through "Know Your Customer" protocols. Third, stablecoins cannot replicate the elasticity of bank-created money that supports credit creation in modern economies. These shortcomings make stablecoins inherently unstable compared to central bank money, with the potential to create financial instability if widely adopted without proper regulation.

How Do Stablecoins Compare to Historical Private Banknotes?

Hyun Shin, Economic Adviser at BIS, draws a striking parallel between today's stablecoins and the private banknotes issued during the 19th century era of "free banking" in the United States. Like those historical banknotes, stablecoins trade at varying exchange rates depending on the credibility of their issuer, undermining the unitary nature of modern money. This fragmentation creates inefficiency in payments and complicates monetary policy. The comparison suggests that without central bank backing, stablecoins may face similar limitations that ultimately led to the demise of private banknote systems.

What Are the Risks of Stablecoin Collapses?

The BIS warns of "fire sale" risks when stablecoins fail, citing the 2022 collapses of TerraUSD (UST) and the Luna token as cautionary examples. When stablecoins face redemption pressures, the sudden liquidation of their reserve assets can destabilize financial markets. Andrea Maechler, BIS Deputy General Manager, raises critical questions about the transparency of stablecoin reserves: "You will always have the question about the quality of the asset backing. Is the money really there? Where is it?" These concerns have already led to regulatory challenges, such as Tether's recent withdrawal from the EU market.

What Alternative Does BIS Propose?

The BIS suggests that central banks should lead the development of tokenized "unified ledger" platforms combining central bank reserves, commercial bank money, and government securities. Outgoing BIS General Manager Agustín Carstens argues that next-generation money must combine central bank trust with the functionality enabled by tokenization. This approach WOULD maintain central bank money as the primary means of global payment while enabling innovation through programmability. Tokenized central bank reserves could provide a stable settlement layer for wholesale transactions, while tokenized commercial bank money could build on the proven two-tier banking system.

Could Stablecoins Still Play a Role in Payments?

Despite the criticisms, some observers note that stablecoins could gain traction in consumer payments if properly regulated. Visa has piloted USDC transactions, and both Visa and Mastercard are exploring blockchain-based cross-border payments. Stripe is working to make USDC available to Shopify merchants. However, the BIS maintains that without addressing their fundamental weaknesses, stablecoins may remain limited to niche applications rather than becoming mainstream money.

Frequently Asked Questions

Why do central banks criticize stablecoins?

Central banks criticize stablecoins for lacking three key attributes of reliable money: central bank backing, safeguards against illegal use, and the ability to support credit creation. The BIS concludes they perform "poorly" as money compared to fiat currency.

How are stablecoins like historical private banknotes?

BIS economist Hyun Shin compares stablecoins to 19th century private banknotes that traded at varying exchange rates depending on the issuer's credibility. Like those banknotes, stablecoins lack the unitary nature and universal acceptance of central bank money.

What happens when stablecoins collapse?

The BIS warns of "fire sale" risks where the rapid liquidation of reserve assets during a stablecoin collapse can destabilize markets, as seen in the 2022 TerraUSD/Luna crash.

What solution does BIS propose?

The BIS advocates for tokenized central bank money on unified ledger platforms that combine the trust of central banks with the programmability of blockchain technology.

Can stablecoins still be useful for payments?

While companies like Visa and Stripe are experimenting with stablecoin payments, the BIS believes they will remain niche instruments unless fundamental weaknesses are addressed through regulation.