BIS: Stablecoins fall short as money, risk emerging markets

The Bank for International Settlements in Basel, in its annual report, concluded privately issued stablecoins do not meet the legal, institutional or functional standards required of national currencies.

The report assesses stablecoins against three traditional functions of money: medium of exchange, unit of account and store of value. It finds shortcomings in public acceptance, legal clarity and consistent backing arrangements.

Those gaps limit stablecoins' ability to operate as reliable money for the general public, the report notes.

The BIS highlighted risks that could be concentrated in emerging-market economies. Large-scale use of stablecoins could alter capital flows, weaken the transmission of domestic monetary policy and increase exposure to foreign currency risk in countries with less-developed financial systems.

The report also identifies regulatory gaps and operational vulnerabilities around reserve management and payment settlement. It points to conversion and redemption pressures that could strain reserve assets and to the potential for runs on issuers if backing claims are questioned.

When private tokens gain wide use in jurisdictions with weak institutions, local authorities may face more difficult choices on regulation, currency management and consumer protection, the report warns. Cross-border use can complicate oversight when issuers, users and infrastructure fall under different legal systems.

Most widely used stablecoins are issued by private firms and aim to maintain a peg to a major fiat currency through holdings such as cash, short-term securities and other assets. The BIS says variation in backing and governance makes it hard for regulators to assess true liquidity and risk exposure.

The report provides background on stablecoins' role in crypto trading and payments. It notes proponents view them as less volatile than other cryptocurrencies, while critics call for clearer rules on reserves, disclosure and access to emergency liquidity.

The annual report reiterates central banks' position that privately issued stablecoins should not be treated as substitutes for sovereign money without stronger oversight and clearer safeguards.