BIS Says Tokenization is the Future, but Stablecoins Pose Risks

BIS Warns Against Stablecoins, Urges Central Banks to Lead Digital Currency Revolution

The Bank for International Settlements (BIS), often called the “central bank for central banks,” has issued a comprehensive study outlining its vision for the next generation of the financial and monetary system. While acknowledging the potential of asset tokenization, the BIS expresses significant concerns about the growing popularity of stablecoins.

According to the BIS, stablecoins fall short in key areas: uniqueness, elasticity, and integrity. This assessment comes as Christine Lagarde, President of the European Central Bank, calls for swift action in creating a digital Euro, citing concerns that dollar-backed stablecoins could undermine monetary policy decisions.

BIS Highlights Stablecoin Shortcomings

The BIS report emphasizes that while stablecoins offer some promise in the realm of tokenization, they don’t meet the necessary criteria to serve as the foundation of the monetary system. The report defines these criteria as:

• Uniqueness: Acceptance of the payment method or currency within the market.
• Elasticity: The ability to expand or contract the monetary base as needed.
• Integrity: Security of the currency, including resistance to fraud, manipulation, and losses.

The BIS believes that stablecoins currently lack these essential attributes.

Concerns About Systemic Risk

The BIS’s primary concern is that the stablecoin sector’s continued growth could lead to a situation where the collapse of a major stablecoin could negatively impact the traditional financial system, even if stablecoins play a secondary role.

“Society has a choice,” the BIS writes. “The monetary system can evolve into a next-generation system built on the tested foundations of trust and technologically superior, programmable infrastructures. Or society can relearn historical lessons about the limitations of unbacked money, with real social costs, by taking a detour through private digital currencies that fail the triple test of singleness, elasticity, and integrity.”

BIS Calls for Central Bank Leadership

The BIS advocates for central banks and other public authorities to “steer the financial system down the right path.”

“As guardians of monetary and financial stability, central banks need to lead this transformation.”

BIS Recommendations for the Future of Finance

The BIS outlines four key recommendations:

1. Replicate the core features of the current financial system in the digital environment.
2. Establish clear regulatory frameworks.
3. Provide the assets and platforms for a tokenized system.
4. Foster public-private partnerships.

Essentially, the BIS is urging central banks to develop their own stablecoins, ensuring they meet the necessary criteria for stability and integrity.