Author: Daniel Kuhn
Translator: far, Centreless
Original Title: Bank for International Settlements: Stablecoins Failed to Pass "Three Key Tests" and Are Not True Currency
The Bank for International Settlements states that stablecoins are not currency.
The institution, sometimes referred to as the "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 make them a pillar of the monetary system: singularity, resilience, and completeness.
BIS, while examining the next generation of finance in its annual report, stated: "The role of innovations like stablecoins in the future monetary system remains to be seen. However, they perform poorly when measuring the three ideal characteristics of sound monetary arrangements, and thus cannot become a pillar of the future monetary system."
According to the report's authors, stablecoins do have some advantages—such as programmability, pseudo-anonymity, and "user-friendly access." Moreover, their "technical characteristics suggest they may offer lower costs and faster transaction speeds," especially in cross-border payments.
However, compared to currencies issued by central banks and tools issued by commercial banks and other private sector entities, stablecoins may pose risks to the global financial system by undermining government monetary sovereignty (sometimes through "hidden dollarization") and facilitating criminal activities, the authors said.
Despite stablecoins having a clear role in entry and exit channels of the crypto ecosystem and becoming 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, stablecoins failed the resilience test due to their structural design. Taking Tether's USDT as an example, this stablecoin is backed by "nominally equivalent assets," with any "additional issuance requiring full prepayment by holders," imposing a "pre-paid constraint."
Furthermore, unlike central bank reserves, stablecoins do not meet the "singularity" requirement of currency—that it can be issued by different banks and unconditionally accepted by everyone—because they are typically issued by centralized entities that may set different standards and do not necessarily always provide the same settlement guarantees.
The authors wrote: "Stablecoin holders will note the issuer's name, just like private bank notes circulating 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 have "significant deficiencies" in promoting monetary system completeness, as not all issuers follow standardized Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines, and they cannot effectively prevent financial crimes.
Transformative Tokenization
Circle, the issuer of stablecoin USDC, saw its stock price drop over 15% on Tuesday following the BIS report release. The day before, CRCL stock had hit a historic high of $299, rising over 600% from its initial public offering price of around $32.
Despite expressing concerns, the organization remains optimistic about the potential of tokenization, viewing it as a "revolutionary innovation" across areas from cross-border payments to securities markets.
The authors wrote: "A tokenization platform centered on central bank reserves, commercial bank money, and government bonds could lay the foundation for the next generation of monetary and financial systems."
