Written by: Daniel Kuhn

Compiled by: far, Centreless

The Bank for International Settlements stated that stablecoins are not currency.

The institution, sometimes referred to as 'the central bank of central banks,' noted in a report released on Tuesday that digital assets pegged to fiat currencies failed to pass the 'three key tests' required to become pillars of the monetary system: singularity, resilience, and integrity.

In its annual report reviewing the next generation of finance, BIS stated: 'It remains to be seen what role innovations like stablecoins will play in the future monetary system. However, they perform poorly in measuring the three ideal characteristics that sound monetary arrangements should possess, and therefore cannot become pillars of the future monetary system.'

According to the report's authors, stablecoins do have some advantages—such as programmability, pseudonymity, and 'user-friendly access for new users.' Additionally, their 'technical characteristics mean they may offer lower costs and faster transaction speeds,' especially in cross-border payments.

However, compared to currencies issued by central banks and instruments issued by commercial banks and other private sector entities, stablecoins may pose risks to the global financial system by undermining the monetary sovereignty of governments (sometimes through 'covert dollarization') and facilitating criminal activities, the authors stated.

Although stablecoins have a clear role in providing access to the crypto ecosystem and are increasingly popular in countries with high inflation, capital controls, or difficulty obtaining dollar accounts, these assets should not be treated as cash.

Three key tests

Specifically, due to its structural design, stablecoins failed the resilience test. For example, Tether's USDT stablecoin is backed by 'nominally equivalent assets,' and any 'additional issuance requires full prepayment from holders,' which imposes 'upfront cash constraints.'

Moreover, unlike central bank reserves, stablecoins do not meet the 'singularity' requirement of currency—that is, currency can be issued by different banks and unconditionally accepted by everyone—because they are typically issued by centralized entities, which may set different standards and do not always provide the same settlement guarantees.

The authors wrote: 'Holders of stablecoins label the issuer's name, just like private banknotes that circulated during the free banking era in 19th century America. Therefore, stablecoins are often traded at different exchange rates, undermining the singularity of currency.'

For similar reasons, stablecoins also have 'significant flaws' in promoting the integrity of the monetary system, as not all issuers adhere to standardized Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines, nor are they effective in preventing financial crime.

Transformative Tokenization

The issuer of the stablecoin USDC, Circle, saw its stock price drop more than 15% on Tuesday after the release of the BIS report. The day before, CRCL stock had reached an all-time high of $299, up over 600% from its initial public offering price of about $32.

Despite the concerns expressed by the BIS, the organization remains optimistic about the potential of tokenization, viewing it as a 'revolutionary innovation' in areas ranging from cross-border payments to securities markets.

The authors wrote: 'A tokenization platform centered on central bank reserves, commercial bank currency, and government bonds can lay the foundation for the next generation of currency and financial systems.'