The Bank for International Settlements (BIS) has issued a stark warning about the risks associated with stablecoins and has called for countries to swiftly move towards the tokenisation of their currencies. This comes as stablecoins, a type of cryptocurrency designed to maintain a constant value, have gained popularity in the market.
Stablecoins, which are often pegged to a fiat currency like the U.S. dollar, pose several concerns according to the BIS. These concerns include the potential to undermine monetary sovereignty, transparency issues, and the risk of capital flight from emerging economies. The BIS highlighted that stablecoins lack the traditional settlement function provided by central banks, similar to private banknotes circulating in the 19th-century Free Banking era in the United States.
The market for stablecoins is dominated by dollar-pegged coins, accounting for 99% of the market with over $260 billion worth of coins in circulation. However, the BIS cautioned that stablecoins as a form of sound money fall short and without proper regulation, they could pose a risk to financial stability and monetary sovereignty.
The BIS recommended that central banks move towards a tokenised “unified ledger” that incorporates central bank reserves, commercial bank deposits, and government bonds. This would create a digitalised central bank system that settles payments and securities trades almost instantaneously, making the system more transparent, resilient, and interoperable.
While tokenisation offers many benefits, there are challenges to overcome. These include determining who sets the rules governing the platform and ensuring that individual countries retain control over how and who uses their currencies. Despite these challenges, the BIS emphasized the importance of bold action to realise the full potential of a tokenised system.
In conclusion, the BIS’s warning about stablecoins and call for tokenisation reflect the growing importance of digital currencies in the global financial system. By addressing the risks posed by stablecoins and embracing tokenisation, central banks can ensure a more secure and efficient system for global payments and securities trades.