Why Stablecoins Still Can’t Replace Fiat: The Settlement Function Gap

Crypto's favorite dollar clones hit a wall—they don't settle like real money.

The dirty little secret of stablecoins

While traders treat USDT and USDC as digital dollar twins, regulators keep pointing out the obvious: pressing 'send' on a stablecoin transaction isn't the same as wiring actual currency. The settlement finality that makes fiat irreplaceable? Missing in action.

Bankers 1, Crypto Bros 0

Traditional payment rails laugh at blockchain's 'near-instant' transfers—without legal settlement certainty, stablecoins remain glorious IOU coupons. But hey, at least they're more useful than your bank's 3pm Friday cutoff time.

Until stablecoins get the legal teeth of real money, they'll keep playing in finance's shallow end—no matter how much volume they process. The irony? The 'stable' in their name refers to price, not function.

Shin says stablecoins lack the settlement function of fiat money

STABLECOINS WARNING: Central banks report stablecoins "perform poorly" as money, raising concerns over their role in the financial system.

— Redline (@redlinefeeds) June 24, 2025

Hyun Shin, the Economic Adviser at BIS, explained that stablecoins as digital bearer instruments lacked the traditional settlement function provided by a central bank with fiat money. He likened them to private banknotes circulating in the 19th-century Free Banking era in the U.S., meaning they could only trade at varying exchange rates depending on the issuer, undermining the no-questions-asked principle of central bank-issued money.

BIS Deputy General Manager Andrea Maechler also said there was concern about who controlled stablecoins. The whole question of disclosure was where some of the stablecoins differed. 

“You will always have the question about the quality of the asset backing. Is the money really there? Where is it?”

-Andrea Maechler, Deputy General Manager at BIS

Shin warned of the risk of “fire sales” of the assets backing stablecoins if they collapsed, citing what happened to TerraUSD (USDT-USD) and the LUNA token in 2022. There was also the issue with Tether quitting the EU market due to regulatory bumps despite dominating more than half of the stablecoin market.

The outgoing head of the BIS, Agustin Carstens, believes the next-generation monetary and financial system must combine the time-tested principles of trust in money backed by central banks with the functionality unlocked by tokenization. He adds that the system is expected to deliver improvements to current practices and to enable new economic arrangements 

Carstens claims that bold action is required 

Carstens said that realizing the full potential of the stablecoin system required bold action. However, many issues WOULD need to be overcome, including who sets the rules governing the “programmable ‘unified ledger’ platform” and that individual nations would likely want to retain control of how and who uses their currencies.

The BIS hinted that it wanted central banks to “go down the route” of a tokenized “unified ledger” incorporating central bank reserves, commercial bank deposits, and government bonds. This would mean that central bank money would remain the primary means of global payment. Currencies and bonds worldwide could also be integrated into the same “programmable platform.”

Shin also said tokenized central bank reserves provided a stable and trusted settlement asset for wholesale transactions in a tokenized ecosystem, ensuring the singleness of money. Tokenized commercial bank money could build on the proven two-tier system, offering new functionalities while preserving trust and stability. Shin also pointed out that tokenized government bonds could enhance liquidity and support various financial transactions, from collateral management to monetary policy operations.

The WSJ also noted recently that stablecoins had a shot at being used in many consumer payments—”if they play their cards right,” alluding to the integration of stablecoins with Visa and MasterCard. Visa has already piloted settling transactions in USDC, and both networks are exploring ways to modernize cross-border payments using blockchain-based infrastructure. Stripe is also working to bring USDC into the market as an acceptable payment currency to Shopify merchants.

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