The BIS warns that stablecoins are not suitable for large-scale payments, advocating for tokenized bank deposits instead.
Pablo Hernández de Cos, the head of the Bank for International Settlements (BIS), expressed concerns that stablecoins are not reliable for large-scale payment systems, as reported by Reuters.
The BIS advocates for tokenized bank deposits as a more stable foundation for the future of digital finance.
Limitations of Stablecoins for Payments
During a symposium at the Federal Reserve's Jackson Hole event, Hernández de Cos outlined several inherent limitations of stablecoins, including fragmentation, compatibility issues, challenges in adhering to anti-money laundering (AML) regulations, and risks to monetary sovereignty.
He clarified that while stablecoins might fulfill niche roles, they do not currently provide a viable framework for everyday global transactions.
The BIS emphasizes that tokenized deposits are better suited for integrating blockchain technologies into the existing financial system, although these too face regulatory and governance challenges.
BIS Advocates for Stricter Issuer Regulations
Hernández de Cos's comments coincided with a new study from the Financial Stability Institute, a BIS branch, which analyzed stablecoin regulations across different jurisdictions, revealing varying approaches to issuer oversight.
The study suggests that the core functions of stablecoin issuers should include issuance, redemption, and reserve management, while additional activities like lending could increase risk and require enhanced safeguards.
The BIS is particularly wary of non-bank issuers, as they may evade consolidated supervision, prompting calls for broader regulatory oversight extending to entire corporate groups.
Contrasting Views on Stablecoins
The BIS's critical stance is particularly significant given the expanding stablecoin market and the more favorable perspective of U.S. regulators, who see stablecoins as a means to bolster the dollar and increase demand for U.S. government bonds, according to Reuters.
While acknowledging the potential benefits of the technology, the BIS advocates separating specialized crypto assets from those intended for mass payment infrastructure.
This perspective suggests that while stablecoins will continue to play a role in the crypto market and decentralized finance (DeFi), their integration into traditional payment systems will be limited, with tokenized deposits from commercial banks forming the core of future financial infrastructure.
Furthermore, the BIS has previously warned about risks linked to stablecoins, noting that their issuers often hold significant amounts of short-term government bonds, which could create pressures on money markets during mass token redemptions.
In June, BIS experts pointed out in their annual report that current stablecoins do not meet essential money characteristics, and their growth could intensify financial fragmentation, particularly in countries with weaker currencies.
