Stablecoins Lack the Settlement Function of Fiat Money, Warns BIS in Groundbreaking Report

In a stark warning to the crypto industry, the Bank for International Settlements (BIS) has declared that stablecoins have "performed poorly" as money, failing three critical tests of monetary function. The 2025 annual economic report reveals that stablecoins lack central bank backing, sufficient safeguards against illegal use, and the financial flexibility needed for lending. While their future role remains uncertain, the BIS suggests stablecoins may only serve a subsidiary function in finance. The report, set for release on June 28, 2025, also highlights stablecoins' attractiveness for criminal activity due to weak Know-Your-Customer controls. Additional concerns include threats to monetary sovereignty, transparency issues, and risks of capital flight from emerging economies.

Why Stablecoins Fail as Money According to BIS

The BIS evaluation identified three fundamental failures of stablecoins: they lack central bank support (the "celibacy" test), demonstrate insufficient elasticity for lending (the "elasticity" test), and fail to prevent illicit use (the "integrity" test). Unlike fiat currency, stablecoins cannot guarantee final settlement, creating systemic vulnerabilities. The report compares them to private banknotes from the 19th century free banking era in the U.S., which traded at varying exchange rates depending on issuer credibility. This undermines the fundamental principle of uniform value that central bank money provides.

The Sovereignty and Stability Risks of Stablecoins

BIS Economic Advisor Hyun Shin emphasized that stablecoins, as digital bearer instruments, lack the traditional settlement function provided by central bank fiat. Deputy General Manager Andrea Maechler raised concerns about asset backing transparency: "You always have the question of asset backing quality. Is the money really there? Where is it?" The report cites the 2022 collapse of TerraUSD (UST) and Luna as examples of the "fire sale" risk when supporting assets fail. Tether's regulatory challenges in the EU market, despite commanding over 50% market share, further illustrate these vulnerabilities.

The BIS Vision for Next-Generation Monetary Systems

Outgoing BIS chief Agustin Carstens proposes combining the proven trust principles of central bank money with tokenization's functionality. The envisioned system WOULD feature a "programmable unified ledger" incorporating tokenized central bank reserves, commercial bank deposits, and government securities. This approach would maintain central bank money as the primary global payment method while enabling new economic arrangements. Tokenized central bank reserves could provide stable settlement assets for wholesale transactions, while tokenized commercial bank money could preserve the two-tier system's stability. Government bond tokenization might enhance liquidity for collateral management and monetary operations.

Stablecoins' Potential in Consumer Payments

Despite the criticisms, the Wall Street Journal notes stablecoins could gain traction in consumer payments through partnerships with traditional networks. Visa has piloted USDC settlement transactions, while both Visa and Mastercard explore blockchain-based cross-border payment solutions. Payment processor Stripe is working to establish USDC as an acceptable payment currency for merchants. These developments suggest stablecoins might find utility if properly integrated with existing financial infrastructure and regulatory frameworks.

Frequently Asked Questions

Why do stablecoins fail as money according to the BIS?

The BIS identifies three key failures: lack of central bank backing (celibacy test), insufficient elasticity for lending (elasticity test), and inadequate safeguards against illegal use (integrity test).

What risks do stablecoins pose to financial systems?

Major risks include threats to monetary sovereignty, transparency issues about asset backing, potential for criminal use, and risks of capital flight from emerging economies.

How does the BIS propose to improve digital money systems?

The BIS advocates for a "programmable unified ledger" combining tokenized central bank reserves, commercial bank deposits, and government securities while maintaining central bank money as the anchor.

Can stablecoins still be useful for payments?

Yes, through integration with traditional payment networks like Visa and Mastercard, stablecoins may find applications in consumer payments and cross-border transactions if regulatory challenges are addressed.