BIS Annual Report: Why Stablecoins Fail the Test of Money
The Bank for International Settlements challenges stablecoins as reliable money. Here’s the balanced breakdown.
The Bank for International Settlements (BIS) – the central bank for central banks – released its annual report flagging that stablecoins lack key properties of money and warning of risks, particularly in emerging markets. This has reignited the debate: can a privately-issued digital asset ever serve as a reliable medium of exchange, unit of account, and store of value? The report criticizes stablecoin design and adoption, but advocates point to their utility in unstable economies. Here’s what the BIS said and how both sides frame the issue.
What the BIS Report Actually Says
The BIS Annual Report notes that stablecoins are designed to maintain a stable value, but in practice they often fail to deliver on all three traditional functions of money. The report highlights that many stablecoins are not fully backed by safe and liquid assets, and redemption mechanisms can be unreliable. It warns that their use in emerging markets – where they are touted as a hedge against inflation or weak currencies – could introduce new financial stability risks, including capital flow volatility and exposure to the underlying reserve risks.
The Case for Stablecoins: Utility in Practice
Supporters of stablecoins argue that in countries with high inflation, capital controls, or limited access to US dollars, stablecoins like USDT (Tether) and USDC have become critical financial tools. They enable cross-border payments, savings, and commercial transactions where traditional banking is slow or inaccessible. Proponents claim that even if theoretical money properties are imperfect, stablecoins provide a real-world improvement over local currencies. Furthermore, major issuers have increased transparency and token composition audits to address concerns about backing.
The Case Against: Systemic and Regulatory Risks
Critics – including the BIS and many central banks – counter that stablecoin stability is a mirage. They point to historical de-pegging events, such as the collapse of TerraUSD (UST) in 2022 and occasional slips of USDT below $1, as evidence of fragility. In emerging markets, the BIS warns that a run on a stablecoin could trigger financial contagion, especially if residents have substituted their local currency for stablecoins en masse. Regulators also worry about opaque reserve management, misuse for illicit finance, and the lack of consumer protections. The BIS advocates for robust global standards and regulatory frameworks to address these gaps.
What to Watch Next
The BIS report is not legally binding, but it signals a hardening stance among global central banks. Key developments to track include: the progress of the IMF and Financial Stability Board (FSB) on stablecoin guidelines; regulatory actions in emerging economies like Turkey, Nigeria, and Argentina; and whether major stablecoin issuers voluntarily move toward more transparent, tightly managed reserve structures. Also watch for central bank digital currency (CBDC) rollouts, which directly compete with stablecoins for the same use case.
What did the BIS say about stablecoins in its annual report?
The BIS said stablecoins lack key properties of reliable money and warned of risks, especially in emerging markets, including potential financial instability and insufficient backing.
Why are stablecoins popular in emerging markets?
They offer a digital dollar alternative where local currencies are unstable or capital controls restrict access to foreign currency, enabling savings and payments.
What are the main arguments against stablecoins?
Critics highlight de-pegging events, opaque reserves, potential for financial contagion, and lack of consumer protections, arguing they are not as safe as traditional money.
Do regulators support or oppose stablecoins?
Most regulators support stablecoins only if they are properly regulated with full backing and transparency. The BIS and many central banks advocate for strong global standards.
How might the BIS report affect stablecoin adoption?
It could accelerate regulatory scrutiny and push issuers toward more transparent practices, while also encouraging central banks to accelerate their own CBDC projects.