$315B Stablecoin Market Faces BIS Warning as Dollar Tokens Threaten Finance Stability

Key Takeaways:

• The Bank for International Settlement cautions that stablecoins may destabilise credit, policy and finances 
• Stablecoins pegged against the dollar dominate and are yet to acquire the essential characteristics of money 
• Risks are bank deposit outflows, regulatory gaps and increasing dollarization pressure 

Central bankers are raising their eyebrows although stablecoins are increasing rapidly. A new speech from the BIS highlights both the promise and the structural weaknesses of these crypto-native assets.

Speaking at a seminar hosted by the Bank of Japan in Tokyo, Pablo Hernández de Cos laid out a clear message: stablecoins are not ready to function as real money at scale.

He acknowledged their strengths. Stablecoins can make transferring quick, integrate with smart contracts, and enhance cross-border payments. However, these benefits come at a price.

The existing designs are very much dependent on confidence in the reserves of fiat and the issuers. That makes it vulnerable particularly at times of market stress.

The stablecoin market in the world amounts to around $315 billion. Though that is a big number, it is not high when compared to traditional banking deposits. Nonetheless, the trends in growth indicate the growing demand in digital and dollar-linked assets.

Read More: SocGen’s $USDCV Hits MetaMask, Unlocking Millions of Users for Regulated Stablecoins

Although adopted, stablecoins do not have two critical characteristics of money: value consistency and cross-system usability.

• Prices will be stressed out of their price peg of $1 
• The redemption procedure is not always straightforward and certain 
• Blockchains are fragmented in terms of liquidity 

In contrast to bank money, balance sheets are not settled on central bank balance sheets. This means users cannot always assume “one dollar equals one dollar” across platforms.

Another area identified by the BIS was the possible implications on traditional finance. The result of users moving their funds out of bank deposits into stablecoins would be stricter funding conditions by banks. This could lead to:

• An increase in the cost of borrowing by both households and businesses 
• Reduced lending capacity 
• Greater reliance on volatile wholesale funding 

Stablecoins are usually anchored by holding reserves such as government bonds, or bank reserves. Large-scale redemptions in the case of crisis would cause a stream of asset sales to financial markets, further straining them.

Read More: FDIC Drops 190-Page Stablecoin Rulebook – GENIUS Act Sets Strict New Standards

The stable coins are mostly pegged against the US dollar which strengthens its position globally. Users in emerging markets currently use stablecoins as a store of value since the local currencies are weaker. This is a worrying trend:

• More dollarization of economies 
• Weakened performance of local monetary policy 
• Easier movement of capital outside regulatory systems 

Meanwhile, part of the stability coins is not subject to conventional compliance rules. This poses a problem in the enforcement of anti-money laundering and financial supervision.

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