The current "stablecoins" fail to provide the essential properties of money and could exacerbate financial system fragmentation and risks for countries with weaker currencies as they grow. This is stated in the annual report from the Bank for International Settlements (BIS).
According to the organization, existing stablecoins do not facilitate transactions directly or indirectly on central bank balance sheets. As a result, they do not guarantee nominal exchange between issuers and blockchains under any conditions. The friction involved in redemption makes these instruments more akin to ETFs than to a full-fledged means of payment.
The report also highlights the open blockchains where stablecoins operate. The BIS pointed out the fragmentation between L1 and L2 networks and the deterioration of compatibility— the same stablecoin is not natively interchangeable across different protocols.
Source: BIS.The document also lists KYC and AML/CFT risks due to pseudonymity and non-custodial wallets, as well as unclear accountability, weak transparency, and governance issues.
According to BIS, the market capitalization of stablecoins was around $320 billion at the end of May. The bank warned that a wider adoption of such assets could increase banks' funding costs and restrict lending to the real economy.
Source: BIS.One specific risk identified by the BIS is "stablecoin dollarization." The rising demand for dollar-denominated stablecoins in countries with weaker currencies could heighten the volatility of cross-border capital flows and undermine monetary sovereignty.
As an alternative, the bank suggested developing a legal infrastructure for tokenization.
Recall that in April, the BIS emphasized the need for global regulation of "stablecoins." The organization believes these assets are more akin to investment instruments.