BIS issues its most severe warning yet: Stablecoins are not "sound money".

The China Currency NetworkBank for International Settlements (BIS), known as the "central bank of central banks," in its latest annual report issued an unusually strong warning, indicating that stablecoins are destabilizing the foundations of the global financial system and may pose a substantial threat to monetary sovereignty. Although the official report will be released this Sunday, its key points have already been revealed, focusing on the risks of stablecoins and the future direction of the monetary system.

BIS warns that if left unregulated, stablecoins cannot be considered sound money and may undermine the monetary issuance function of central banks and public trust.

Dollar-Pegged Dominance and Capital Flight Risks Highlighted

Stablecoins are a type of cryptocurrency pegged to fiat currencies, intended to maintain stable value. Currently, over 99% of stablecoins are pegged to the US dollar, with a total issuance exceeding $260 billion. BIS points out that the risks posed by this concentration cannot be ignored, especially in emerging markets where it can easily trigger capital flight.

Chief Economic Advisor Hyun Song Shin emphasized that stablecoins lack the traditional settlement and payment functions provided by central bank systems. He compared them to the private banknotes of the "free banking era" in the 19th-century United States, which were notorious for causing monetary value differences and system chaos due to lack of uniformity.

He warned, "Monetary uniformity is not a negotiable issue. It either exists, or it completely disintegrates."

Lack of Regulation and Transparency May Lead to Liquidity Crises

BIS also questions the collateral assets of stablecoins, believing that their potential vulnerabilities could trigger systemic risks. The report states that if a specific stablecoin collapses, the assets behind it could face concentrated sell-offs, impacting the financial markets.

These concerns are not unfounded. In 2022, the collapses of TerraUSD (UST) and LUNA triggered a massive market chain reaction, which is still viewed as a typical case of stablecoin crisis.

BIS Deputy General Manager Andrea Maechler stated that significant differences exist among stablecoins in terms of asset disclosure and governance structures. She bluntly asked, "Are the assets really there? The public and regulators can't be sure."

Tether Exits the EU, Exposing Regulatory Disparities

Currently, Tether, the largest stablecoin by market share, controls more than half of the market. However, when the EU introduced new regulations requiring stablecoin operators to obtain licenses, Tether chose to exit the market, highlighting the complexity of the regulatory tug-of-war.

BIS points out that stablecoins lack a globally unified regulatory framework, with control concentrated in private enterprises, raising financial governance risks, particularly in macro-financial stability.

Promoting a Tokenized Monetary System: Central Banks' New Strategic Direction

To counter the shocks stablecoins might cause, BIS suggests in its report that central banks should accelerate the process of a "unified ledger" architecture for tokenizing currency. This system aims to integrate central bank money, commercial bank deposits, and government bond assets on a single platform to enable programmable, cross-border, low-cost financial transactions.

Through tokenization, central banks can strengthen payment transparency and settlement efficiency while enhancing the financial system's resilience. Shin emphasized that this digital architecture will help avoid the spread of unregulated cryptocurrencies while preserving central banks' core control over monetary policy.

Challenges in Achieving Tokenization

However, BIS acknowledges that realizing this vision will require overcoming institutional challenges, such as who sets the platform rules, whether to cede sovereignty, and how to ensure system interoperability.

Outgoing BIS President Agustin Carstens stated, "Realizing the full potential of this system requires decisive and bold action."

BIS urges central banks not to wait but to take proactive steps to inject stability, security, and modernization into the global financial system.

Risk Warning and Disclaimer

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.

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