Central banks have expressed concerns over the ultimate role of stablecoins in the financial system, citing their poor performance as money.
Shortcomings of Stablecoins
A special chapter from the upcoming BIS annual report stated that stablecoins fail three main tests of money: lacking central bank backing, insufficient measures against illegal use, and lacking flexibility for lending. Moreover, stablecoins have become popular among criminals for bypassing integrity safeguards.
Comparison with Traditional Currencies
Hyun Shin, Economic Adviser at BIS, pointed out that stablecoins lack the settlement functions provided by central banks through fiat money. He compared them to private banknotes of the 19th century, which underscores their instability and distrust as a medium of exchange. BIS Deputy General Manager Andrea Maechler also voiced concerns about insufficient transparency and control over stablecoins.
Prospects and Challenges for the Stablecoin System
Agustin Carstens, the outgoing head of BIS, noted that realizing the full potential of the stablecoin system requires bold action. He emphasized the need for clarity on who will define the regulatory framework for this system. BIS indicates that central banks should move towards a tokenized platform that integrates central bank reserves, commercial bank deposits, and government bonds.
In light of these findings, central banks underline the need for regulation and further examination of stablecoins to potentially secure a more significant role in the global financial system.
