- The Bank for International Settlements (BIS) argues that stablecoins function more like exchange-traded funds than true money, as their prices often deviate from par and redemptions can be slow or uncertain.
- Stablecoin transfers "settle neither directly nor indirectly on central bank balance sheets," and "they cannot currently ensure exchange at par across issuers and blockchains under all conditions," BIS said.
- The report warns that dollar-pegged stablecoins are accelerating dollarization in vulnerable economies, undermining local currencies and evading traditional capital controls.
The crypto industry has long pitched stablecoins, tokens pegged to fiat currencies, as the future of blockchain-based money and payments. But the Bank for International Settlements' (BIS) latest annual report is throwing cold water on that narrative.
The report argued that stablecoins are acting less like money and more like exchange-traded funds (ETFs) or other alternative investment vehicles, whose units allow traders to gain exposure to a wide range of assets held by the fund.
The hallmark of true money is that it is accepted as a means of payment "with no questions asked." When you pay with dollars at the grocery store, malls, airports, hotels, or just about anywhere, nobody questions its legitimacy or its value. Whether it's a physical bill or a bank deposit, it's expected to be worth exactly its face value.
Secondary-market prices of tokenized versions of fiat currencies deviate from par, though mostly moderately. In other words, the token doesn't always trade at exactly $1. That's just like an ETF, which typically trades at a slight premium or discount to the fund's net asset value.
Redemptions also aren't as smooth as widely perceived, meaning investors converting a stablecoin back to cash may not always get an instant, guaranteed exchange at par value, much like ETF share redemptions can involve delays or costs depending on the fund structure.
"Redemption frictions are common, indicating that current stablecoin designs resemble exchange-traded fund (ETF) shares rather than means of payment," the report said.
More importantly, stablecoin transfers "settle neither directly nor indirectly on central bank balance sheets," and "they cannot currently ensure exchange at par across issuers and blockchains under all conditions." This is unlike a bank deposit, which is ultimately backed by access to central bank money.
The BIS believes a stablecoin's value is determined by the market's confidence in the issuer's reserves and redemption mechanism — not by a direct, guaranteed claim on the monetary system, as with a bank deposit.
Stablecoins also fail to act as money is the cash-in-advance model, whereby an issuer mints a new token only once a user deposits the equivalent cash, according to BIS.
This 100% pre-funding requirement means an issuer can't flexibly expand supply to meet economic needs, the way a commercial bank does by issuing loans that create new deposit money on its balance sheet without waiting for a customer to walk in with cash first.
Foreign exchange nightmare
Crypto was supposed to be an alternative to fiat, especially the dollar. Stablecoins are doing the opposite, and accelerating dollarization in the process, the BIS said.
The report found rising flows of non-dollar currencies into US dollar-pegged stablecoins, and said these flows can weaken domestic currencies in the spot market. They also expose friction in arbitrage between crypto markets and conventional foreign exchange (FX) markets, and may raise the cost of buying dollars through the FX swap market.
The BIS frames this as a new, faster version of an old problem: deposit dollarization, where households create foreign-currency bank deposits during periods of macroeconomic instability in the home country. The same triggers apply, the report says as high inflation and sovereign stress drive larger inflows into foreign stablecoins. And once that kind of dollarization takes hold, the BIS notes, it tends to persist for years.
What makes the stablecoin version harder to manage is enforcement. A number of countries, particularly emerging market and developing economies, have already imposed restrictions on cross-border stablecoin use. But the BIS says such measures "are, however, likely to be imperfect given the digital bearer-like nature of tokens and the availability of unhosted wallets."
In other words, capital controls that work reasonably well on traditional bank deposits don't translate cleanly to a self-custodied, borderless token.
