BIS: Stablecoins Behave Like ETFs, Risk Market Fragmentation

The Bank for International Settlements, in a report from its Basel-based secretariat, said many stablecoins function more like exchange-traded funds than as widely used means of payment. The report warned that without common global rules, stablecoin activity could split across jurisdictions and fragment markets.

The report noted that many issuers back tokens with pools of tradable assets, promise redemption and allow public trading on secondary markets. Those features make some stablecoins comparable to open-ended investment funds because market trading can set token prices independently of underlying reserves and redemptions can create liquidity pressure.

The BIS highlighted the risk that national and regional regulators will adopt divergent approaches. Different rules on reserve composition, disclosure, redemption rights and supervision could lead issuers and trading activity to cluster in jurisdictions with more favorable rules, increasing the potential for regulatory arbitrage.

The paper pointed to concentration among a small number of large issuers and dominant trading platforms. Such concentration could transmit shocks quickly across markets. The report said differing national on- and off-ramps could also make it harder to move funds across borders and fragment cross-border payment flows.

The report identified specific technical features that drive ETF-like behaviour: diversified backing portfolios, public market pricing that can diverge from reserve values, and redemption mechanisms that may trigger runs when holders lose confidence. These dynamics can produce sudden liquidity strains when many token holders seek conversion at once.

The BIS set out policy implications without prescribing a single regulatory model. The paper recommended aligning international standards on reserves, governance, transparency and redemption mechanics to reduce fragmentation and make it easier for supervisors to monitor systemic risk.

The report said the ETF comparison applies most closely to tokens backed by tradable asset pools and offering open-ended redemption. It added that those structures expose holders to market and liquidity risks similar to those faced by open-ended investment funds.

Central banks and international standard-setting bodies are already discussing how to regulate stablecoins. The BIS wrote that the timing and content of those decisions will affect whether stablecoins integrate into the broader financial system or contribute to fragmented markets.