LONDON—The Bank for International Settlements (BIS) has delivered a strong warning about the growing risks of stablecoins, urging governments to accelerate the tokenization of official currencies as a safer alternative, Reuters reported.
In a preview of its annual report, the BIS highlighted a range of concerns, including stablecoins’ potential to erode monetary sovereignty, create transparency gaps, and trigger capital flight—particularly from emerging markets, Reuters reported.
The warning comes after the U.S. Senate approved legislation to establish a regulatory framework for U.S. dollar-backed stablecoins, a move widely expected to spur further adoption if passed by the House.
“Stablecoins fall short as sound money and, without proper regulation, pose threats to both financial stability and monetary sovereignty,” the BIS said.
Hyun Song Shin, Economic Adviser at the BIS, compared stablecoins to the privately issued banknotes of the U.S. Free Banking era in the 19th century, warning that they often trade at fluctuating exchange rates based on the credibility of the issuer. That, he noted, undermines the "no-questions-asked" trust inherent in central bank money, Reuters reported.
“You either have singleness of money, or you don’t,” Shin said, cautioning that a collapse of stablecoins could trigger “fire sales” of the reserve assets backing them—echoing the 2022 implosion of TerraUSD and its sister coin LUNA.
The BIS also raised alarms over the outsized influence of certain issuers. Tether, which controls over half the global stablecoin market, recently exited the European Union after new rules required stablecoin providers to obtain licenses within the bloc, Reuters reported.