BIS Takes Aim at Stablecoin Transparency and Stability

A paper published by the Bank for International Settlements takes aim at stablecoins, observing that not one in circulation has been able to maintain parity with its peg at all times and none meets the key criteria for being a safe store of value and a trustworthy means of payment in the real economy.

The paper acknowledges that stablecoins are generally less volatile than many other cryptoassets, but warns nonetheless that in addition to the aforementioned probles, there are “significant” data gaps that make deciphering the risk to the smooth functioning of payments systems and financial stability more broadly much harder.

The paper observes that the “significant turbulence” in the cryptoasset market during 2022 and early 2023 stymied the growth of stablecoins, and that it added urgency to authorities efforts to address potential risks from the products. The upheaval also led to some central banks accelerating their work on CBDCs (central bank digital currencies).

The paper analyses the performance and behaviour of 68 stablecoins and asks four key questions:

• Are the stablecoins able to maintain parity with their peg?
• Are stablecoins stable?
• How are stablecoins backed?
• What are stablecoins used for?

As noted, no coin managed to maintain parity, but on the second question the research finds that fiat-backed stablecoins have generally displayed the lowest volatility – they were in fact, less volatile that the S&P500. Unbacked stablecoins (which would appear to be a victory for marketing over reality), and which make up around 1% of stablecoin assets, were the most volatile, in some cases more so than cryptoassets themselves. Commodity- and crypto-backed stablecoins have higher volatility than fiat-backed coins, but the gap has narrowed in recent months and years. Unsurprisingly perhaps, newer coins tend to be more volatile and price volatility is very coin-specific.

The stablecoins we see today do not live up to their name, nor do they meet the key criteria for being a safe store of value or a trustworthy means of payment for the real economy

The paper points out that transparency around how the stablecoins are backed is variable, with some publishing data on a daily basis and others, USD Coin and Binance USD are cited, on a monthly basis. Still others do it at even less frequent intervals or on an ad hoc basis. It warns, however, that reserve reports are not based upon a particular reporting standard and that “Even where information is available, it is often unclear whether the published information has been audited. That is, it is often unclear whether the value, break-down, and sufficiency of reserves has been examined and attested to by an independent certified public accountant.”

Observing that a recent BIS survey shows that, to date, stablecoins are seldom used for payments outside the crypto ecosystem, the paper asks, “So what, then, are they used for?” It adds that they have been used mainly to facilitate cryptoasset trading by serving as a bridge between official currencies and cryptoassets. Moreover, stablecoins have been documented as playing an important role as liquidity providers in decentralised finance (DeFi).

“However, as data on actual stablecoin usage are hard to obtain, it remains unclear for which types of DeFi services they are used, and how significant their DeFi use is relative to other purposes,” the paper states. “Other (anecdotal) evidence suggests for example that stablecoins are also used as a store of value to avoid high inflation and preserve purchasing power in times of crisis.

The paper concludes by observing, “One thing is certain: a stablecoin that never breaks its peg has yet to emerge”, adding, “Moreover, there is no guarantee that the stablecoin issuers have the assets required to be able to redeem the coins at all times.”

It continues, “The lack of transparency regarding the availability and quality of these reserves may undermine trust in stablecoins’ credibility and their ability to maintain their peg. For these reasons, the stablecoins we see today do not live up to their name, nor do they meet the key criteria for being a safe store of value or a trustworthy means of payment for the real economy.”

The paper also highlights how the lack of data is hindering understanding of the stablecoin market, as well as authorities’ ability to make informed decisions and their ability to  intervene if necessary. “Appropriate regulation and supervision are essential, not only to serve as a legal basis for the collection of more detailed data, but also to prevent stablecoins from compromising the safety and efficiency of payments and the financial system more broadly,” it states.