The Bank for International Settlements (BIS) has issued a stark warning regarding the alleged risks associated with stablecoins, urging nations to expedite the tokenization of their currencies.
The BIS, often referred to as the central bank for central banks, highlighted concerns such as stablecoins’ potential to undermine monetary sovereignty, transparency issues, and the risk of capital flight from developing economies.
In an early release of its annual report, the BIS stated, “Stablecoins as a form of sound money fall short, and without regulation pose a risk to financial stability and monetary sovereignty.”
Hyun Song Shin, the BIS’s Economic Adviser, elaborated on the limitations of stablecoins, noting that they lack the traditional settlement functions provided by central banks.
Shin also warned of the potential for “fire sales” of the assets backing stablecoins in the event of a collapse, referencing the failures of TerraUSD (UST) and LUNA in 2022.
Additionally, concerns have arisen regarding the control of stablecoins, particularly given that Tether commands more than half of the market but withdrew from the European Union following the introduction of new licensing requirements for stablecoin operators.
Andrea Maechler, Deputy General Manager of the BIS, pointed out that issues surrounding transparency and asset quality remain critical. “You will always have the question about the quality of the asset backing. Is the money really there? Where is it?” she asked.
This approach aims to ensure that central bank money remains the primary means of global payment while integrating currencies and bonds into a single “programmable platform.”
Tokenization is expected to create a digitalized central banking system that facilitates instantaneous and cost-effective payment and securities transactions by eliminating time-consuming checks, while also enhancing functionality.
However, significant hurdles remain, including the question of who will establish the governing rules for the platform and the desire of individual countries to maintain control over their monetary systems.
Featured image from DALL-E, chart from TradingView.co
