The head of the Bank for International Settlements (BIS), Pablo Hernández de Cos, stated that stablecoins do not currently appear to be a reliable means of payment on an economy-wide scale, according to Reuters.
BIS believes that tokenized bank deposits should form the foundation of the digital financial system.
Stablecoins Not Suited for Mass Payments
The BIS General Manager, speaking at the Federal Reserve’s Jackson Hole symposium, noted that stablecoins face several fundamental limitations. These include fragmentation, interoperability issues, challenges with AML compliance, and risks to monetary sovereignty.
According to de Cos, while stablecoins may serve specific niche functions, they are not yet a convincing foundation for everyday payments on a global scale.
BIS suggests tokenized deposits as an alternative. These maintain a connection with the banking system and, according to the regulator, are better suited for integrating blockchain technology into the existing financial infrastructure.
However, de Cos acknowledged that tokenized deposits also face issues with interoperability, regulation, and governance.
BIS Proposes Stricter Limits on Issuers
The BIS chief’s stance coincided with the release of a new study by 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 suggest that issuance, redemption, and reserve management should be considered core functions of an issuer. Additional operations, such as lending, staking, or custodial services, can significantly alter a company’s risk profile and require additional safeguards.
BIS is particularly concerned about non-bank issuers. While banks are subject to consolidated supervision, major players from other sectors could potentially circumvent these through separate legal entities. Therefore, regulators propose extending oversight from individual issuers to entire corporate groups.
Conflict of Two Approaches
The BIS position is notable amid the rapid growth of the stablecoin market and more favorable views from U.S. authorities. American officials see stablecoins as a tool to strengthen the dollar’s role and an additional source of demand for U.S. government bonds, Reuters noted.
BIS does not deny the technology’s benefits. However, the regulator suggests separating crypto assets for specialized scenarios from mass payment infrastructure.
Under this approach, stablecoins may remain crucial in the crypto market, cross-border transactions, and DeFi, but their role in the traditional payment system will be limited. The foundation of tokenized financial infrastructure will be commercial bank money in the form of tokenized deposits.
BIS has previously highlighted specific risks associated with stablecoins: their issuers hold significant portfolios of short-term government bonds, and mass redemptions of tokens could force them to sell such assets, putting pressure on money markets.
In June, BIS experts noted in their annual report that current stablecoins do not provide key monetary properties and could exacerbate financial system fragmentation and risks for countries with weaker currencies as they grow.
