Are Stablecoins the Future of Money? Not So Fast, Says the BIS
A new report from the Bank for International Settlements (BIS) offers a deep dive into the future of the monetary system, driven by innovations like tokenization. While acknowledging the promise of new technologies, the BIS argues that stablecoins, in their current form, are not equipped to be the foundation of a next-generation monetary system.
The report measures new forms of digital money against three essential tests that a sound monetary system must pass:
- Singleness: Money should be a stable unit of account, where different forms of it (like deposits at different banks) are interchangeable at par. Stablecoins fail this test as they often trade at varying rates, similar to private banknotes in the 19th century, undermining the "no-questions-asked" principle of sound money.
- Elasticity: The monetary system must be able to flexibly expand the supply of money and credit to meet the economy's needs, especially for large-value payments. Stablecoins lack this elasticity because their issuance typically requires full upfront backing, imposing a "cash-in-advance" constraint that prevents the flexible credit creation vital for a modern economy.
- Integrity: A trustworthy monetary system must have robust safeguards against illicit activities like money laundering and terrorist financing. The pseudonymous and borderless nature of stablecoins, especially when used with unhosted wallets, creates significant challenges for know-your-customer (KYC) compliance, making them attractive for illicit use.
While stablecoins have highlighted the demand for new technological features in finance, the BIS concludes they fall short on these fundamental characteristics. The report suggests a better path forward lies in innovating on the proven foundation of the existing two-tier system, leveraging tokenization with central bank money at the core to build a more efficient and trustworthy financial future.