Warning From Central Banks: Stablecoins Fall Short As Effective Monetary Tools

The Bank for International Settlements (BIS) has issued a stark warning regarding the alleged risks associated with stablecoins, urging nations to expedite the tokenization of their currencies. 

Stablecoins Under Scrutiny

The BIS, often referred to as the central bank for central banks, highlighted concerns such as stablecoins’ potential to undermine monetary sovereignty, transparency issues, and the risk of capital flight from developing economies. 

This announcement comes shortly after the US Senate passed the country’s stablecoin bill (GENIUS Act), aimed at establishing a regulatory framework for US-dollar-pegged stablecoins, a move that could significantly boost their popularity if approved by the House.

In an early release of its annual report, the BIS stated, “Stablecoins as a form of sound money fall short, and without regulation pose a risk to financial stability and monetary sovereignty.” 

Hyun Song Shin, the BIS’s Economic Adviser, elaborated on the limitations of stablecoins, noting that they lack the traditional settlement functions provided by central banks. 

He drew parallels to the private banknotes that circulated during the 19th-century Free Banking era in the United States, emphasizing that stablecoins can trade at varying exchange rates based on the issuer, which undermines the reliability of central bank-issued currency.

Shin also warned of the potential for “fire sales” of the assets backing stablecoins in the event of a collapse, referencing the failures of TerraUSD (UST) and LUNA in 2022. 

Additionally, concerns have arisen regarding the control of stablecoins, particularly given that Tether commands more than half of the market but withdrew from the European Union following the introduction of new licensing requirements for stablecoin operators.

BIS Advocates For Tokenized Unified Ledge

Andrea Maechler, Deputy General Manager of the BIS, pointed out that issues surrounding transparency and asset quality remain critical. “You will always have the question about the quality of the asset backing. Is the money really there? Where is it?” she asked.

To address these challenges, the BIS advocates for central banks to pursue a tokenized “unified ledger” that incorporates central bank reserves, commercial bank deposits, and government bonds. 

This approach aims to ensure that central bank money remains the primary means of global payment while integrating currencies and bonds into a single “programmable platform.” 

Tokenization is expected to create a digitalized central banking system that facilitates instantaneous and cost-effective payment and securities transactions by eliminating time-consuming checks, while also enhancing functionality.

The proposed system aims to accomplish, according to the bank, “greater transparency, resilience, and interoperability,” potentially shielding it from some of the more volatile aspects of cryptocurrencies. 

However, significant hurdles remain, including the question of who will establish the governing rules for the platform and the desire of individual countries to maintain control over their monetary systems.

Featured image from DALL-E, chart from TradingView.co