Bank for International Settlements: Stablecoins have not passed key tests and are not considered true currency

The Bank for International Settlements recently released a report stating that stablecoins should not be regarded as true currencies. This institution, known as the "central bank of central banks," believes that digital assets pegged to fiat currencies have failed to pass the three key tests required to become a pillar of the monetary system: uniqueness, resilience, and integrity.

In its annual report, the bank for international settlements examined next-generation finance. The report pointed out that while the role of innovations such as stablecoins in the future monetary system is still unclear, they perform poorly when measuring the three ideal characteristics that sound monetary arrangements should possess, and therefore cannot become the core of the future monetary system.

The report acknowledges that stablecoins do have some advantages, such as programmability, pseudonymity, and user-friendly access methods. In addition, their technical characteristics may lead to lower costs and faster transaction speeds, especially in the field of cross-border payments.

However, compared to the currencies issued by central banks and the instruments 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 covert dollarization) and fostering illicit activities.

Although stablecoins play an important role as a gateway in the cryptocurrency ecosystem and are becoming more popular in countries with high inflation, capital controls, or difficulties in accessing dollar accounts, the report suggests that these assets should not be treated as cash.

Specifically, due to its structural design, the stablecoin failed the elasticity test. Taking a well-known stablecoin as an example, it is backed by "nominally equivalent assets", and any additional issuance requires full prepayment from holders, which imposes a "prepayment constraint".

In addition, unlike central bank reserves, stablecoins do not meet the "uniqueness" requirement of money — that is, money can be issued by different banks and accepted unconditionally by everyone. This is because stablecoins are typically issued by centralized entities, which may set different standards and may not always provide the same settlement guarantees.

The report points out that holders of stablecoins will label the name of the issuer, just like the private banknotes that circulated during the free banking era in the United States in the 19th century. As a result, stablecoins are often traded at different exchange rates, undermining the uniformity of currency.

For similar reasons, stablecoins also have significant flaws in promoting the integrity of the monetary system, as not all issuers adhere to standardized KYC and AML guidelines, and they are unable to effectively prevent financial crimes.

Despite the concerns expressed by the bank for international settlements, the organization remains optimistic about the potential of tokenization, believing it to be a revolutionary innovation across various fields, from cross-border payments to the securities market.

The report concludes that a tokenization platform centered around central bank reserves, commercial bank currency, and government bonds can lay the foundation for the next generation of currency and financial systems.