The Bank for International Settlements (BIS) 2025 Annual Economic Report Chapter III clearly states that although stablecoins have certain advantages in programmability and cross-border payments, they cannot become the pillar of future monetary systems due to significant defects in the three major tests of singleness, elasticity, and integrity.

The history of the monetary system is a constantly evolving interaction between technology and economics. From paper ledgers to digital ledgers, each technological advancement in the monetary system has propelled significant leaps in economic activity. In recent years, the rise of blockchain and tokenization technologies has brought new possibilities for monetary and financial systems. Tokenization refers to the process of recording ownership rights of real or financial assets on a programmable platform, integrating central bank reserves, commercial bank currencies, and financial assets through a unified ledger, aiming to improve the efficiency of the existing system and open up new contractual possibilities.

However, stablecoins, as an emerging form of digital currency, attempt to provide a stable medium of exchange by pegging their value to fiat currencies (such as the USD). Although stablecoins show some potential in the crypto ecosystem, the BIS points out significant defects in their ability to become pillars of the monetary system. The report assesses the gap between stablecoins and the traditional two-tier monetary system (centered on central banks) through the three major tests of singleness, elasticity, and integrity.

Analysis of the Three Major Tests of Stablecoins

1. Singleness

Singleness is the core of the monetary system, referring to the ability of money to be accepted at face value in the economy without due diligence (the 'no-questions-asked' principle). The central bank ensures the singleness of money by providing reserves as the ultimate settlement asset. In a two-tier monetary system, commercial bank deposits have uniformity because they can be settled at face value through central bank reserves.

In contrast, stablecoins as digital bearer instruments are similar to private bank notes from the 19th-century Free Banking Era in the United States. The report notes that stablecoins are issued by different issuers, and holders have bilateral claims against each issuer, leading to different exchange rates in secondary markets, departing from singleness. For example, recipients may receive 'red dollars' or 'blue dollars,' which have different values due to variations in issuer credit, undermining the 'unconditional acceptance' principle. The report cites data (Graph 1.B) showing that stablecoin prices often deviate from face value, highlighting their fragile peg mechanism (Ma et al., 2023).

2. Elasticity

Elasticity refers to the ability of a monetary system to flexibly meet the demand for large payments in the economy and avoid 'gridlock' in the payment system. In a two-tier monetary system, the central bank provides intraday liquidity through a real-time gross settlement (RTGS) system, while commercial banks flexibly expand their balance sheets through lending and overdraft mechanisms. This elasticity is crucial for large payments and supply chain liquidity in the modern economy.

Stablecoins perform poorly in the elasticity test. As they are typically fully backed by equivalent assets, issuers cannot arbitrarily expand their balance sheets; any new issuance requires the holders to prepay the full amount (cash-in-advance constraint). This contrasts sharply with the elastic money creation mechanism of commercial banks. The report illustrates how central banks and commercial banks support economic activity by providing instant liquidity, while the strict prepayment requirements of stablecoins limit their applicability in large payments (Banerjee et al., 2025).

3. Integrity

Integrity requires the monetary system to withstand fraud, financial crimes, and illegal activities. The two-tier monetary system mandates strict customer due diligence (KYC) procedures for intermediaries like banks through anti-money laundering (AML) and counter-terrorism financing (CFT) regulations to ensure traceability of transactions.

Stablecoins have significant defects in integrity due to the nature of their holders on public blockchains and their anonymity (pseudonymity). The report points out that stablecoin transactions are conducted via wallet addresses, lacking the identity verification mechanisms of traditional bank accounts. Although blockchain transactions are traceable, tools such as 'mixers' can obscure the source of funds, increasing the risk of illegal use. Stablecoins have been used for money laundering and terrorist financing activities, such as organizations like Hamas using stablecoins for fundraising (Berwick & Talley, 2024). Furthermore, stablecoin issuers often do not verify the identities of their holders, and KYC compliance is weak, making it difficult to meet system-level integrity requirements.

Other Risks and Challenges of Stablecoins

The report further identifies three additional risks of stablecoins:

Threat to monetary sovereignty: Over 99% of stablecoins are denominated in USD (Graph 2.A), with surging cross-border transaction volumes in countries with high inflation or currency fluctuations (Graph 2.B). This may lead to 'stealth dollarization,' weakening the ability to implement national monetary policy (BIS-CPMI, 2023).

Risks to financial stability: The rapid growth of the stablecoin market (Graph 1.A), mainly dominated by Tether (USDT) and Circle (USDC). Should an event similar to the 2022 collapse of TerraUSD occur, the 'fire sales' of stablecoin-supported assets (such as U.S. Treasury bonds) could impact traditional financial markets (Ahmed & Aldasoro, 2025).

Contradiction in business models: Stablecoin issuers face a conflict between ensuring par convertibility and pursuing profitability. Investing in risky assets can enhance returns but increases redemption risks; if holding low-risk, highly liquid assets (such as central bank reserves), profits are slim, and the business model is unsustainable (Aldasoro et al., 2024).

BIS's Vision for the Next Generation Monetary System

In light of the limitations of stablecoins, the BIS proposes a next-generation vision for the monetary and financial system centered on tokenization, emphasizing the leading role of central banks. Key elements include:

The Trilogy of Tokenization: Tokenized central bank reserves, commercial bank currencies, and government bonds collectively form the foundation of a unified ledger. Tokenized reserves ensure the singleness of money, tokenized deposits provide new functionalities, and tokenized bonds enhance liquidity.

Unified Ledger: By integrating currency and asset operations, a unified ledger can achieve a seamless combination of messaging, verification, and asset transfer, reducing operational risks and costs in cross-border payments and capital markets.

The catalytic role of central banks: Central banks need to provide tokenized reserves, establish regulatory frameworks, promote public-private partnerships, and experiment with tokenization technologies through projects like Agorá, Pine, and Promissa (BIS, 2024b; Federal Reserve Bank of New York-BIS, 2025).

The report uses Project Pine as an example to demonstrate the potential of tokenized systems in monetary policy operations. Through smart contracts, central banks can adjust liquidity facilities in real-time, automate collateral management and interest calculations, thereby improving operational efficiency (Graph 8).

Policy Implications

The BIS report clearly states that although stablecoins have certain advantages in programmability and cross-border payments, they cannot become the pillar of future monetary systems due to significant defects in the three major tests of singleness, elasticity, and integrity. Their decentralized design and anonymity increase the risk of financial crimes, while strict asset-backed mechanisms limit their elasticity, potentially threatening monetary sovereignty and financial stability.

In contrast, a tokenized financial system centered on central bank reserves offers a more robust solution. Through a unified ledger and the trilogy of tokenization, this system can enhance efficiency and inclusivity while retaining the trust foundation of the existing system. Central banks need to lead innovation, set standards, and promote cooperation to guide the monetary system toward this direction.

How would Hayek defend stablecoins if he were still alive?

Although the BIS believes that stablecoins can only play a secondary role due to failures in the three major tests, Hayek would defend them from the perspective of monetary competition. The rapid growth of stablecoins (Graph 1.A, led by Tether and USDC) indicates a market demand for private forms of currency, especially in cross-border payments and high-inflation countries (Graph 2.B). Hayek would view this as an embodiment of spontaneous market order, demonstrating that private currency can meet specific needs outside the central banking system.

Hayek might point out that the defects of stablecoins (such as issues of singleness and integrity) are temporary phenomena in the market evolution process. Through competition, the market will filter out more reliable issuers and more stable mechanisms. For instance, Tether and USDC have dominated the stablecoin market through economies of scale and brand effects, which aligns with Hayek's theory of competition. Moreover, the decentralized design and programmability of stablecoins provide space for innovation and may give rise to new financial instruments that challenge the BIS's bias toward a central bank-dominated system.

Hayek's perspective reveals an excessive reliance on central bank dominance that may stifle innovation and entrench the inefficiencies of the existing system. For instance, the complexity and high costs of cross-border payments are pain points of the traditional two-tier system, while stablecoins have shown cost advantages in certain scenarios (BIS-CPMI, 2023). Hayek would argue that the BIS underestimates the market's potential to solve these issues through competition.

From Hayek's monetary theory perspective, the BIS's criticism of stablecoins overemphasizes the role of central banks and neglects the potential of monetary competition and spontaneous market order. The defects of stablecoins regarding singleness, elasticity, and integrity are normal phenomena in market evolution, which can be gradually resolved through competition and innovation. Hayek would oppose the BIS's vision of tokenization, arguing that it reinforces central planning and restricts the creativity of the private sector.

The future development of the monetary system may require finding a balance between Hayek's free market principles and the BIS's central bank leadership, allowing stablecoins to compete within a regulated framework while leveraging tokenization technology to enhance efficiency.

References

BIS (2025). Annual Economic Report 2025, Chapter III.bis.org/publ/arpdf/ar2…

Ahmed, R., & Aldasoro, I. (2025). Stablecoins and safe asset prices. BIS Working Papers, no 1270.

Aldasoro, I., et al. (2024). On par: a money view of stablecoins. Journal of Financial Market Infrastructures, 11(4), 47-64.

Banerjee, R., et al. (2025). Elasticity in the monetary system. BIS Bulletin, no 101.

Berwick, A., & Talley, I. (2024). US probes Hamas’s use of crypto before Oct 7. Wall Street Journal, 13 March.

BIS-CPMI (2023). Considerations for the use of stablecoin arrangements in cross-border payments.

Federal Reserve Bank of New York-BIS (2025). Project Pine: central bank open market operations with smart contracts.

Ma, Y., et al. (2023). Stablecoin runs and the centralization of arbitrage. Available at ssrn.com/abstract=43985…, F. A. (1976). Denationalisation of Money. Institute of Economic Affairs.

BIS (2025). Annual Economic Report 2025, Chapter III.

Ahmed, R., & Aldasoro, I. (2025). Stablecoins and safe asset prices. BIS Working Papers, no 1270.

Boissay, F., et al. (2022). Blockchain scalability and the fragmentation of crypto. BIS Bulletin, no 56.

BIS-CPMI (2023). Considerations for the use of stablecoin arrangements in cross-border payments.

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