Stablecoins Inadequate as Money, but Tokenisation Next Gen: BIS

Despite the blockbuster listing from stablecoin issuer Circle in June, the Bank for International Settlements remains unimpressed. The central bankers’ central bank dubbed stablecoins inadequate on Tuesday in a special chapter in its annual report, noting that as a form of money these digital tokens “fall short” and pose risks to financial stability and monetary sovereignty without appropriate regulation.

Despite a downbeat tone about the reported $250 billion stablecoin space, the BIS says tokenisation will usher in a new, next-generation era for global financial markets, enhancing efficiency and opening new frontiers for cross-border payments, securities markets and beyond.

The difference in views, perhaps unsurprisingly, has the future role of central banks and money issued by them at its heart. While the BIS says a “trilogy” of tokenised central bank reserves, commercial bank money and government bonds represent the future of financial markets and will deliver “profound change”, stablecoins on their own won’t represent an improvement. Hyun Song Shin economic adviser and head of the Monetary and Economic Department argues that the trilogy is the only way of maintaining the key principles of sound money: singleness, elasticity and integrity.

“Trust in money remains crucial for the economy’s functioning, regardless of technological change,” the report states. “The issuance of private currencies like stablecoins satisfies a demand for new technological features. Yet even with regulation, stablecoins’ limitations cast serious doubts about their ability to be the mainstay of the monetary system.

“There are better ways to meet the legitimate demand for new functions in the monetary and financial system. Innovation built on unified ledgers is promising, unlocking efficiency gains and new contracting possibilities…To make this future a reality, central banks must play a catalytic role,” it continues.

The role of central banks is stressed by Agustín Carstens, general manager of the BIS, who says, “The next-generation monetary and financial system combines the time-tested principles of trust in money underpinned by central banks with the functionality unlocked by tokenisation. This system is poised to deliver substantial improvements to current practices and to enable entirely new economic arrangements. Realising the full potential of the system requires bold actions by central banks, which need to work in partnership with the private sector and other public authorities.”

The report comes just days after the US Congress passed the so-called Genius Act, which sets out rules for stablecoin issuers and provides a playbook for the Trump administration’s ambitions to become a global leader in digital assets. Shortly after coming to power, President Trump banned central bank digital currencies and research into them, lending full support to stablecoins instead.