Bank for International Settlements: Stablecoins do not meet currency standards and have failed key tests

Recently, the bank for international settlements released a report questioning the monetary attributes of stablecoins. This institution, known as the "central bank of central banks," pointed out that digital assets pegged to fiat currencies failed to pass the three key tests required to become a pillar of the monetary system: uniqueness, resilience, and integrity.

The report believes that the role of stablecoins in the future monetary system remains unclear. Although they have some advantages, such as programmability, pseudo-anonymity, and user-friendly access, they perform poorly when measured against the three ideal characteristics that a sound monetary arrangement should possess, and therefore cannot become the core of the future monetary system.

Stablecoins do indeed have advantages in certain aspects, such as potentially offering lower costs and faster transaction speeds in terms of technical features, especially in the field of cross-border payments. However, compared to currencies issued by central banks and instruments issued by commercial banks and other private sector entities, stablecoins may pose risks to the global financial system by undermining the monetary sovereignty of governments (sometimes through covert dollarization) and fostering illegal activities.

Although stablecoins play an important role in the crypto ecosystem and are increasingly popular in some countries facing high inflation, capital controls, or difficulty in obtaining dollar accounts, the report argues that these assets should not be treated as cash.

Detailed Explanation of Three Key Tests

1. Elastic Testing: Taking a well-known stablecoin as an example, due to its structural design, this type of stablecoin is backed by "nominally equivalent assets" and any additional issuance requires full prepayment from the holders, which imposes a "prepayment constraint." This design makes it difficult to pass the elastic testing.

2. Uniqueness Test: Unlike central bank reserves, stablecoins do not meet the "uniqueness" requirement of currency. Currency should be issued by different banks and unconditionally accepted by everyone, but stablecoins are typically issued by centralized entities that may set different standards and may not always provide the same settlement guarantees. The report points out that holders of stablecoins label the name of the issuer, which leads to different stablecoins often being traded at different exchange rates, undermining the uniqueness of currency.

3. Integrity Testing: Stablecoins also have "significant flaws" in promoting the integrity of the monetary system. Not all issuers adhere to standardized KYC (Know Your Customer) and AML (Anti-Money Laundering) guidelines, and they are unable to effectively prevent financial crimes.

The Potential of Tokenization

Despite concerns expressed about stablecoins, the bank for international settlements remains optimistic about the potential of tokenization, viewing it as a "revolutionary innovation" across areas from cross-border payments to securities markets. The report notes that a tokenization platform centered around central bank reserves, commercial bank money, and government bonds could lay the foundation for the next generation of currency and financial systems.

The release of this report had a certain impact on the market. The stock price of a well-known stablecoin issuer plummeted significantly after the report was released, with a decline of over 15%. This drop occurred on the day after the company's stock reached an all-time high, having previously risen more than 600% from its initial public offering price.

Overall, this report from the bank for international settlements provides an important discussion foundation for the status and future development of stablecoins in the global financial system, while also offering new perspectives for regulators and market participants.