Pablo Hernández de Cos, the head of the Bank for International Settlements (BIS), stated that stablecoins currently do not appear to be a reliable means of payment on a large economic scale, as reported by Reuters.
The BIS believes that tokenized bank deposits should form the foundation of the digital financial system.
Stablecoins Are Not for Mass Payments
During a symposium hosted by the Federal Reserve in Jackson Hole, the BIS general manager highlighted that “stablecoins” face several fundamental limitations. He pointed out issues such as fragmentation, compatibility challenges, difficulties in meeting anti-money laundering (AML) requirements, and risks to monetary sovereignty.
According to de Cos, while stablecoins may serve specific specialized functions, they do not currently represent a convincing basis for everyday payments on a global scale.
The BIS advocates for tokenized deposits as an alternative, as they maintain a connection to the banking system and are considered more suitable for integrating blockchain technologies into the existing financial infrastructure.
However, de Cos acknowledged that tokenized deposits also have compatibility, regulatory, and governance issues.
BIS Calls for Stricter Limits on Issuers
The BIS chief's remarks coincided with the release of a new study from the Financial Stability Institute, a BIS division. The study examined stablecoin issuance regulations across various jurisdictions and found significant differences in approaches to issuers.
The authors propose that the issuance, redemption, and reserve management should be viewed as the basic functions of an issuer. Additional activities, such as lending, staking, or custodial services, can significantly alter the risk profile of the firm and necessitate extra protective measures.
The BIS is particularly concerned about non-bank issuers. While banks are subject to consolidated supervision, significant players in other sectors could potentially circumvent these through separate legal entities. Therefore, regulators suggest expanding oversight from individual issuers to the entire corporate group.
Conflict Between Two Approaches
The BIS's stance is particularly notable given the rapid growth of the stablecoin market and the more favorable attitude from U.S. authorities. American officials view stablecoins as a tool to strengthen the dollar's position and as an additional source of demand for U.S. government bonds, according to Reuters.
The BIS does not deny the benefits of the technology but suggests differentiating crypto assets for specialized scenarios from the infrastructure for mass payments.
With this approach, stablecoins may remain a significant component of the crypto market, cross-border transactions, and DeFi, yet their role within the traditional payment system will be limited. The foundation of tokenized financial infrastructure will instead be commercial bank money, in the form of tokenized deposits.
Additionally, the BIS has previously indicated certain risks associated with stablecoins: their issuers hold substantial portfolios of short-term government bonds, and mass redemptions of tokens could compel them to sell such assets, exerting pressure on money markets.
It is worth noting that in June, BIS specialists highlighted in their annual report that current “stablecoins” do not fulfill the key properties of money and that further growth could exacerbate financial system fragmentation and risks for countries with weaker currencies.