Central Banks Critique Stablecoins for Poor Monetary Performance

In a recent comprehensive report, the Bank for International Settlements (BIS) has issued a stark warning regarding the performance of stablecoins as a medium of exchange, concluding that they fail to meet essential monetary criteria. The BIS, which serves as a bank for central banks worldwide, stated that stablecoins exhibit significant deficiencies in three key areas: backing by central authorities, safeguards against illicit activities, and the flexibility required for monetary issuance.

The report, released on June 24, 2025, emphasizes that despite being designed to mimic the stability of traditional fiat currencies by maintaining a one-to-one value with assets like government bonds, stablecoins have been increasingly associated with criminal activities, including money laundering and drug trafficking.

Hyun Song Shin, the BIS's head of monetary and economic department, noted that the lack of robust regulatory frameworks around stablecoins poses risks to financial stability. He stated, "It’s really asking, if there are such redemptions in the stablecoin space, what would be the consequences?" According to the BIS, these digital currencies, which currently amount to approximately $250 billion in circulation, predominantly consist of dollar-pegged tokens such as Tether and Circle's USDC.

This critical assessment comes at a time when the U.S. government is revisiting its stance on cryptocurrency regulation, especially under the administration of President Donald Trump, who has positioned himself as a proponent of digital currencies. Following a pledge made during his electoral campaign to establish the U.S. as the global leader in cryptocurrency, the Trump administration has rolled back several regulations instituted during the Biden administration.

The BIS report highlights that stablecoins perform poorly on the fundamental tests of money, which include "singleness, elasticity, and integrity." The lack of backing from central banks means these digital currencies cannot fulfill the role traditionally played by fiat currencies, particularly in times of financial stress when central banks act as lenders of last resort.

Furthermore, the BIS underscores that stablecoins do not possess the flexibility necessary for expanding the money supply through credit creation, as they require full upfront payment for issuance. This presents a significant constraint on their utility as a monetary tool, particularly in crisis situations where liquidity is essential.

The report raises concerns about the implications of stablecoins for monetary sovereignty, especially in emerging markets. The BIS warns that the rise of these private digital currencies could lead to capital flight and a dilution of national monetary authority.

As a possible solution, the BIS advocates for the development of a centralized database of tokenized deposits that could streamline cross-border transactions while reducing costs. This initiative, called Project Agorá, is currently being trialed in collaboration with seven major central banks and 43 commercial institutions.

In conclusion, while the future role of stablecoins remains uncertain, the BIS report makes it clear that their current performance is inadequate for establishing them as a reliable alternative to traditional fiat currencies. The implications of these findings extend beyond financial markets, raising critical questions about regulatory practices and the potential need for a reevaluation of how digital currencies are integrated into the global economy.