BIS Rejects Stablecoin Promise, Citing Fragile Backing and Systemic Risk to the Monetary System
Benzinga and Yahoo Finance LLC may earn commission or revenue on some items through the links below.
The Bank of International Settlements is not buying the stablecoin hype.
Over the past few weeks, stablecoins have been the center of attention as the U.S. advances legislation. Adding to the buzz, the U.S. Treasury continues to wax bullish on the sector and Circle’s (NYSE:CRCL) stock has stunned many with its explosive run since going public.
All of this is predicated on the belief that stablecoins will feature prominently in the evolution of payments and remittances. But the BIS said in a report released Tuesday that it was skeptical that the sector has any future at all.
Don't Miss:
-
Trade crypto futures on Plus500 with up to $200 in bonuses — no wallets, just price speculation and free paper trading to practice different strategies.
-
Grow your IRA or 401(k) with Crypto –unlock the power of alternative investments including a Crypto IRA within your retirement account.
At best, stablecoins will be relegated to “a subsidiary role in the hinterland of the financial system,” BIS said in a statement. “Besides acting as a gateway to the crypto ecosystem, their future role is unclear.”
The bank’s reasoning is that stablecoins do not meet the requirements of sound money.
“Stablecoins perform poorly when assessed against the three tests for serving as the mainstay of the monetary system,” the BIS said. These three tests are “singleness,” “elasticity” and “integrity.”
Stablecoins failed the singleness test because they could trade at premiums or discounts to their pegs, the BIS said. At the same time, it said the assets cannot easily absorb large swings in market demand without large swings in price, unlike fiat, with traditional banks able to expand or contract their balance sheet leveraging credit from the central bank.
Trending: New to crypto?Get up to $400 in rewards for successfully completing short educational courses and making your first qualifying tradeon Coinbase.
The BIS added that stablecoins failed the integrity test because they lacked sufficient guardrails against illicit use in the form of adequate and uniform anti-money laundering and know your customer systems.
Beyond failing the three tests of sound money, the BIS said stablecoins threatened the financial sovereignty of emerging economies through “stealth dollarization.” It also said that continued growth of the sector could pose risks for the bond market, citing the possibility of “fire sales” under stress conditions.
The BIS said that the persistent demand for stablecoins is born out of a real need for the functionalities offered by the technology, such as programmability, lower costs and faster speeds. Warning governments not to ignore this reality, the BIS touts tokenization as the answer. Specifically, the bank proposes a unified ledger integrating central bank reserves, commercial bank deposits and government bonds.
Content Original Link:
" target="_blank">
