In the wave of digital assets, stablecoins are undoubtedly one of the most notable innovations in recent years. With the promise of being pegged to fiat currencies like the dollar, they have built a 'safe haven' for value in the volatile world of cryptocurrencies and are increasingly becoming important infrastructure in decentralized finance (DeFi) and global payments. Their market value has surged from zero to hundreds of billions of dollars, seemingly heralding the rise of a new form of currency.
Figure 1: Global Stablecoin Market Value Growth Trend (Illustrative). Its explosive growth contrasts sharply with the cautious attitude of regulatory agencies.
However, just as the market was celebrating, the Bank for International Settlements (BIS), known as the 'Central Bank of Central Banks,' issued a stern warning in its May 2025 economic report. The BIS clearly pointed out that stablecoins are not truly currencies, and behind their seemingly prosperous ecosystem lies a systemic risk that could shake the entire financial system. This conclusion was like a bucket of cold water, forcing us to reexamine the essence of stablecoins.
The Aiying research team aims to deeply interpret the BIS report, focusing on its proposed 'triple gate' theory of currency — that any reliable monetary system must pass through the tests of Singularity, Elasticity, and Integrity. We will analyze the dilemmas faced by stablecoins at these three gates with specific examples and supplement the reality considerations beyond the BIS framework, ultimately exploring the future direction of currency digitalization.
The First Gate: The Dilemma of Singularity — Can Stablecoins Always Be 'Stable'?
The 'singularity' of money is the cornerstone of the modern financial system. It means that at any time and place, the value of one unit of currency should precisely equal the face value of another unit. In simple terms, 'one dollar is always one dollar.' This constant unity of value is the fundamental premise for fulfilling the three functions of money: unit of account, medium of exchange, and store of value.
The BIS's core argument is that the value anchoring mechanism of stablecoins has inherent flaws that cannot fundamentally guarantee a 1:1 exchange rate with fiat currencies (such as the U.S. dollar). Their trust does not stem from national credit but relies on the commercial credit of private issuers, the quality and transparency of reserve assets, which makes them subject to the risk of 'decoupling' at any time.
The BIS cites the historical 'Free Banking Era' (approximately 1837-1863 in the U.S.) as a mirror. At that time, there was no central bank in the U.S., and state-chartered private banks could issue their own banknotes. These banknotes were theoretically redeemable for gold or silver, but in reality, their value varied based on the issuing bank's creditworthiness and solvency. A 1-dollar bill from a remote bank might only be worth 90 cents in New York or even less. This chaotic situation led to extremely high transaction costs, severely hindering economic development. Today's stablecoins, according to the BIS, are a digital version of this historical disorder — each stablecoin issuer acts like an independent 'private bank,' and whether the 'digital dollar' it issues can truly be redeemed remains an unresolved question.
We need not look too far back in history; recent painful lessons are enough to illustrate the problem. The collapse of the algorithmic stablecoin UST (TerraUSD), which lost its value to zero within days, wiped out hundreds of billions of dollars in market value. This incident vividly demonstrates how fragile the so-called 'stability' is when the trust chain breaks. Even asset-backed stablecoins have faced ongoing scrutiny regarding the composition, auditing, and liquidity of their reserve assets. Thus, stablecoins have already struggled before the first gate of 'singularity.'
The Second Gate: The Tragedy of Elasticity — The 'Beautiful Trap' of 100% Reserves
If 'singularity' concerns the 'quality' of currency, then 'elasticity' concerns the 'quantity' of currency. The 'elasticity' of money refers to the financial system's ability to dynamically create and shrink credit based on the actual demand of economic activity. This is the key engine that enables modern market economies to self-regulate and sustain growth. When the economy is booming, credit expansion supports investment; when the economy cools down, credit contraction is implemented to control risks.
The BIS points out that stablecoins, especially those that claim to hold 100% high-quality liquid assets (such as cash and short-term government bonds) as reserves, are essentially a 'narrow bank' model. This model uses users' funds entirely for holding safe reserve assets and does not engage in lending. While this sounds very secure, it comes at the expense of completely sacrificing monetary 'elasticity.'
We can understand the differences through a scenario comparison:
Traditional Banking System (with Elasticity):
Assuming you deposit 1,000 yuan into a commercial bank. According to the fractional reserve system, the bank may only need to retain 100 yuan as reserves, while the remaining 900 yuan can be loaned to entrepreneurs who need funds. This entrepreneur uses the 900 yuan to pay the supplier, who then deposits this money back into the bank. This cycle continues, with the initial 1,000 yuan deposit generating more currency through the credit creation of the banking system, supporting the operation of the real economy.
Stablecoin System (Lack of Elasticity):
Assuming you purchase 1,000 units of a stablecoin with 1,000 dollars. The issuer promises to deposit all of this 1,000 dollars into a bank or purchase U.S. Treasury bonds as reserves. This money is 'locked in' and cannot be used for lending. If an entrepreneur needs financing, the stablecoin system itself cannot meet this demand. It can only passively wait for more real-world dollars to flow in and cannot create credit based on endogenous economic demand. The entire system resembles a 'stagnant pool,' lacking the ability to self-regulate and support economic growth.
This 'inelastic' characteristic not only limits its own development but also poses a potential shock to the existing financial system. If large amounts of funds flow out of the commercial banking system and into stablecoins, it will directly lead to a reduction in the funds available for banks to lend, shrinking their credit creation capacity (similar to the nature of quantitative tightening). This could trigger credit tightening, raise financing costs, and ultimately harm small and medium-sized enterprises and innovative activities that need financial support the most.
Of course, it should be noted that with the large-scale use of stablecoins in the future, stablecoin banks (for lending) may emerge, allowing credit to be derived back into the banking system in new forms.
The Third Gate: The Lack of Integrity — The Eternal Game Between Anonymity and Regulation
The 'integrity' of money is the 'safety net' of the financial system. It requires that the payment system must be secure, efficient, and capable of effectively preventing illegal activities such as money laundering, terrorist financing, and tax evasion. This requires a sound legal framework, clear delineation of responsibilities, and strong regulatory enforcement capabilities to ensure the legality and compliance of financial activities.
The BIS believes that the underlying technological architecture of stablecoins — especially those built on public chains — poses a severe challenge to financial 'integrity.' The core issue lies in the anonymity and decentralization characteristics, which make traditional financial regulatory methods ineffective.
Let us imagine a specific scenario: a stablecoin worth millions of dollars is transferred from one anonymous address to another on a public chain, and the entire process may take just minutes, with low transaction fees. Although the record of this transaction is publicly accessible on the blockchain, it is exceedingly difficult to match these randomly generated addresses with individuals or entities in the real world. This opens a convenient door for the cross-border flow of illegal funds, rendering core regulatory requirements like 'Know Your Customer' (KYC) and 'Anti-Money Laundering' (AML) essentially ineffective.
In contrast, traditional international bank transfers (such as through the SWIFT system) may sometimes appear inefficient and costly, but their advantage lies in that each transaction is within a tightly regulated network. The remitting bank, receiving bank, and intermediary banks must comply with their respective national laws and regulations, verify the identities of both parties to the transaction, and report suspicious transactions to regulatory authorities. Although this system is cumbersome, it provides a fundamental guarantee for the 'integrity' of the global financial system.
The technical characteristics of stablecoins fundamentally challenge this intermediary-based regulatory model. This is precisely why global regulatory bodies remain highly vigilant and continuously call for their inclusion in comprehensive regulatory frameworks. A monetary system that cannot effectively prevent financial crime, no matter how advanced its technology, cannot gain the ultimate trust of society and government.
Aiying's perspective adds: blaming the 'integrity' issue entirely on the technology itself may be overly pessimistic. With the increasing maturity of on-chain data analysis tools (such as Chainalysis and Elliptic) and the gradual implementation of global regulatory frameworks (such as the EU's Markets in Crypto-Assets Regulation, MiCA), the ability to track stablecoin transactions and implement compliance reviews is rapidly improving. In the future, fully compliant, transparently reserved, and regularly audited 'regulatory-friendly' stablecoins are likely to become mainstream in the market. At that time, the 'integrity' issue will largely be alleviated through the combination of technology and regulation, and should not be seen as an insurmountable obstacle.
2. Supplement and Reflection: What Else Should We See Beyond the BIS Framework?
The BIS's 'triple gate' theory provides us with a grand and profound analytical framework. However, this section is not intended to criticize or refute the practical value of stablecoins; rather, the Aiying research team's approach has consistently been to provide a rational reflection on industry trends, envisioning various possibilities for the future while prioritizing risk avoidance. We hope to offer our clients and industry practitioners a broader, constructive, and supplementary perspective to refine and extend the BIS's arguments and explore some critical real issues that are not deeply addressed in the report.
1. The Technical Vulnerabilities of Stablecoins
In addition to the three major economic challenges, stablecoins are not without flaws at the technical level. Their operation heavily relies on two key infrastructures: the internet and the underlying blockchain network. This means that once a large-scale network outage, submarine cable failure, widespread power outage, or targeted cyberattack occurs, the entire stablecoin system could come to a standstill or even collapse. This absolute dependence on external infrastructure is a significant weakness compared to traditional financial systems. For example, during the recent two-hundred-million-dollar war, Iran experienced a nationwide internet outage and even power outages in some regions; such extreme situations may not have been considered.
A longer-term threat comes from the disruption of cutting-edge technologies. For instance, the maturity of quantum computing could pose a fatal blow to most existing public key encryption algorithms. Once the encryption system protecting the security of blockchain account private keys is breached, the foundational security of the entire digital asset world will cease to exist. Although this seems distant at present, it is a fundamental security risk that must be faced by a currency system intended to carry the flow of global value.
2. The Real Impact of Stablecoins on the Financial System and the 'Ceiling'
The rise of stablecoins has not only created a new asset class but also directly competes with traditional banks for the most core resource — deposits. If this trend of 'financial disintermediation' continues to expand, it will weaken the core position of commercial banks in the financial system, thereby affecting their ability to serve the real economy.
What is even more worth exploring is a widely circulated narrative — 'stablecoin issuers support their value by purchasing U.S. Treasury bonds.' This process is not as simple and direct as it sounds, as there is a critical bottleneck behind it: the reserves of the banking system. Let us visualize this fund flow process through the following diagram:
Figure 2: Diagram of Fund Flow and Constraints for Stablecoins Purchasing U.S. Treasury Bonds
The process analysis is as follows:
Users deposit U.S. dollars into a bank, then transfer the funds to the stablecoin issuer (such as Tether or Circle) via the bank.
The stablecoin issuer receives this U.S. dollar deposit in its partnering commercial bank.
When the issuer decides to use these funds to purchase U.S. Treasury bonds, it needs to instruct its bank to make the payment. This payment process, especially during large-scale operations, will ultimately go through the Federal Reserve's settlement system (Fedwire), resulting in a decrease in the issuer bank's reserve account balance at the Federal Reserve.
Correspondingly, the bank of the party selling the Treasury bonds (such as primary dealers) will see an increase in its reserve account balance.
The key here is that commercial banks' reserves at the Federal Reserve are not unlimited. Banks need to hold enough reserves to meet daily settlements, respond to customer withdrawals, and comply with regulatory requirements (such as the Supplementary Leverage Ratio, SLR). If the scale of stablecoins continues to expand, leading to a significant purchase of U.S. Treasury bonds and excessive consumption of bank system reserves, banks will face liquidity and regulatory pressures. At that time, banks may limit or refuse to provide services to stablecoin issuers. Therefore, the demand for U.S. Treasury bonds by stablecoins is constrained by the adequacy of bank system reserves and regulatory policies, and is not infinitely scalable.
In contrast, traditional money market funds (MMFs) deposit funds back into commercial banks through the repo market, increasing the bank's deposit liabilities (MMF deposits) and reserves. These deposits can be used for the bank's credit creation (such as issuing loans), directly restoring the deposit base of the banking system. Let us visualize this fund flow process through the following diagram:
Figure 3: Diagram of Fund Flow and Constraints for Money Market Funds Purchasing U.S. Treasury Bonds
3. Between 'Encirclement' and 'Co-optation' — The Future Path of Stablecoins
Considering BIS's prudent warnings alongside the realities of market demand, the future of stablecoins seems to be at a crossroads. They face pressures of 'encirclement' from global regulatory bodies while also seeing the possibility of being integrated into the mainstream financial system through 'co-optation.'
Summarizing the Core Contradiction
The future of stablecoins is essentially a game between their 'wild innovative vitality' and the core requirements of the modern financial system for 'stability, safety, and control.' The former brings the possibility of efficiency improvement and inclusive finance, while the latter is the cornerstone of global financial stability. Finding a balance between these two is a common challenge faced by all regulators and market participants.
BIS's Solution: Unified Ledger and Tokenization
In the face of this challenge, the BIS did not choose to completely deny it but instead proposed a grand alternative: a 'Unified Ledger' based on central bank currencies, commercial bank deposits, and tokenized government bonds.
'Tokenized platforms with central bank reserves, commercial bank money and government bonds at the center can lay the groundwork for the next-generation monetary and financial system.' —
BIS Annual Economic Report 2025, Key Takeaways
The Aiying research team believes that this is essentially a 'co-optation' strategy. It aims to absorb the advantages brought by tokenization technologies, such as programmability and atomic settlement, but firmly places them on a trust foundation led by central banks. In this system, innovation is guided to operate within a regulated framework, allowing it to enjoy the technological benefits while ensuring financial stability. Meanwhile, stablecoins can at most play a 'strictly limited, auxiliary role.'
Market Choices and Evolution
Although the BIS has outlined a clear blueprint, the evolution path of the market is often more complex and diverse. The future of stablecoins is likely to present a differentiated situation:
Path to Compliance:
Some stablecoin issuers will actively embrace regulation, achieving complete transparency of reserve assets, undergoing regular third-party audits, and integrating advanced AML/KYC tools. Such 'compliant stablecoins' are expected to be integrated into the existing financial system and become regulated digital payment tools or settlement mediums for tokenized assets.
Offshoring/Niche Market Pathway:
Another portion of stablecoins may choose to operate in regions with relatively loose regulations, continuing to serve the needs of niche markets such as decentralized finance (DeFi) and high-risk cross-border transactions. However, their scale and influence will be strictly limited, making it difficult for them to become mainstream.
The 'triple gate' dilemma of stablecoins not only profoundly reveals their structural defects but also serves as a mirror, reflecting the deficiencies of the existing global financial system in terms of efficiency, cost, and inclusiveness. The BIS report has sounded an alarm, reminding us that we cannot pursue blind technological innovation at the cost of financial stability. However, the true market demand also suggests that the answer on the road to the next generation of financial systems may not be black and white. Real progress may lie in cautiously integrating 'top-down' design with 'bottom-up' market innovation, finding a middle path between 'encirclement' and 'co-optation' that leads to a more efficient, safer, and more inclusive financial future.
