BIS issues serious caution about stablecoins

LONDON (Reuters) – Tough Warning on Stubcoin

The International Bank for Reconciliation has issued a strong warning regarding the dangers linked to stubcoin, advocating for swift action by countries to explore the tokenization of their currencies.

Often referred to as central banks, the BIS expressed concerns about several issues, like potential threats to financial sovereignty, lack of transparency, and the risk of capital flight from emerging markets.

This comes shortly after the US Senate approved a bill that sets out a regulatory framework for stubcoin within the US Dollar.

Stablecoins are a type of cryptocurrency intended to maintain a stable value, typically pegged at a 1:1 ratio with the dollar, and backed by real assets like US Treasuries and gold.

Currently, dollar-pegged coins make up 99% of the market, with over $260 billion in circulation.

BIS criticized the absurd nature of these assets as a sound money alternative, highlighting risks they pose to financial stability and sovereignty in a chapter of its upcoming annual report.

Hyun Sung Shin, an economic adviser at BIS, pointed out that stubcoin lacks the conventional settlement functions typical in central bank-issued fiat money. He likened them to private banknotes that circulated in the 19th century’s US free banking era, where the exchange rates could vary based on the issuer, ultimately undermining the notion of central bank-backed currency.

Singh noted, “You either have a single currency or you don’t.” He cautioned about the possibility of “fire sales” involving assets that support stubcoins, relating it to the issues faced by cryptocurrencies like Terraus (USDT-USD) and Luna back in 2022.

There are also questions about who would oversee Stablecoins. Tether dominates over half of the stablecoin market but plans to exit the EU following new regulations that mandate licensing for stablecoin operators.

Andrea Maechler, Associate General Manager at BIS, raised concerns about disclosure, saying, “You’re always questioning the quality of your asset support. Is the money really there? Where is it?”

The BIS is hopeful that central banks will consider a tokenized “unified ledger” that would combine reserves from central banks, deposits from commercial banks, and government bonds.

This move would ensure central bank money remains a primary tool for global payments, allowing for a cohesive platform integrating global currencies and bonds.

Tokenization aims to establish a digitized central bank framework that facilitates faster and cheaper payment and securities transactions, cutting down on time-consuming checks while introducing innovative features.

It also aims to enhance the system’s transparency, resilience, and interoperability, providing protection against some unpredictable elements seen in cryptocurrencies.