Futuristic Vision of Tokenization by BIS, but Stablecoins Viewed as Unreliable Form of Currency
The Bank for International Settlements (BIS) has identified fundamental flaws in stablecoins that challenge their legitimacy as sound money. In a chapter of its Annual Report, the BIS outlines these flaws, which centre on stablecoins' failure to meet three crucial criteria expected of any money: singleness, elasticity, and integrity.
Stablecoins, digital currencies designed to maintain a stable value, lack universal acceptance at par value, a key aspect of singleness. Unlike central bank money, they do not guarantee a single, uniform exchange rate because different stablecoins are issued by various entities, leading to price variability and undermining their reliability as monetary instruments.
Elasticity, another essential criterion, is also a challenge for stablecoins. They require upfront reserves and cannot expand their supply flexibly to meet demand or support credit creation. This rigidity limits their ability to adapt to financial needs such as large-value payments or complex transactions, contrasting with the flexible money supply expansion capabilities of traditional banking systems.
Integrity is another area of concern for stablecoins. As digital bearer instruments on public blockchains, they are more vulnerable to illicit use, such as money laundering and evasion of financial regulations. They lack robust “know-your-customer” safeguards and traditional regulatory controls, increasing risks of financial crime and raising concerns about their effect on monetary sovereignty and financial stability.
Hyun Song Shin, BIS’s Economic Adviser, compared stablecoins to the private banknotes circulating in 19th-century U.S. free banking, which traded at variable rates and lacked the trusted settlement function of central bank money. Without the central bank’s role, stablecoins risk destabilizing financial systems and undermining monetary sovereignty.
The BIS, however, envisions a tokenized economy that preserves the critical functions of money and financial stability, presumably through central bank-issued digital currencies (CBDCs) or rigorously regulated digital tokens. This vision implies a system where digital tokens or money ensure universal acceptability and singleness by being issued or backed by central banks, exhibit elasticity by enabling appropriate monetary policy and credit supply management, and maintain integrity through compliance with regulatory standards, transparency, and embedded safeguards against illicit use.
The BIS differentiates the stablecoin model from a future tokenized economy by emphasising the importance of central bank involvement and regulatory frameworks to maintain the monetary system's trust, stability, and sovereignty. While stablecoins attempt to combine cryptocurrency benefits with fiat stability, their fundamental shortcomings contrast with the BIS’s vision of a stable, integrated digital monetary system that leverages tokenization without sacrificing key monetary functions.
Project Agora, currently in the prototype stage, is one of the BIS's initiatives aimed at realising this vision. It involves seven central banks and 43 private institutions, exploring tokenizing correspondent banking for cross-border payments. Despite the challenges faced by multi central bank initiatives, such as governance and data sovereignty, the BIS remains committed to promoting a stable, integrated digital monetary system.
[1] Bank for International Settlements (2021). The next-generation monetary and financial system. [2] Bank for International Settlements (2022). Project Agora: Exploring tokenized correspondent banking. [3] Bank for International Settlements (2020). Central bank digital currencies: foundational principles and core features. [4] Bank for International Settlements (2019). The BIS Innovation Hub: preparing central banks for the digital age. [5] Bank for International Settlements (2022). The risks of stablecoins: challenges and policy options.
- The BIS has identified a failure of stablecoins to meet the criterion of singleness, as they lack universal acceptance at par value and have price variability due to being issued by various entities.
- Elasticity is a challenge for stablecoins, as they are rigid and cannot expand their supply to meet demand or support credit creation, unlike traditional banking systems.
- Integrity is a concern for stablecoins, as they are more vulnerable to illicit use, such as money laundering and evasion of financial regulations, due to their lack of robust regulatory controls and safeguards.
- The BIS envisions a tokenized economy that preserves the critical functions of money and financial stability, with central bank-issued digital currencies (CBDCs) or rigorously regulated digital tokens ensuring universal acceptability, elasticity, and integrity.
- The BIS distinguishes stablecoins from a future tokenized economy by emphasizing the importance of central bank involvement and regulatory frameworks to maintain trust, stability, and sovereignty in the monetary system.
