Stablecoins Don’t Meet Core Requirements Of Money, BIS Says

The BIS General Manager has said that existing stablecoins fall short of the requirements for a widely accepted and used payment instrument.

Stablecoins are cryptocurrencies that have their price tied to a fiat currency. In recent years, these tokens have gained popularity, inviting regulation from major economic hubs.

Since stables run on blockchain technology, they naturally offer relatively cheap 24/7 transactions. This has made their main use, besides being a store of value, as a mode of payments.

Stablecoins try to mimic fiat currencies, but do they count as “money”? de Cos has discussed the two features that decide the “moneyness” of an instrument: singleness and interoperability.

First, singleness is the idea that different forms of money should be perfectly substitutable at par across financial intermediaries and platforms. In fiat economics, this is facilitated by central banks. For the decentralized stablecoins, there is no such central settlement so deviations can emerge.

Though, these differences tend to be relatively modest. “Yet confidence shocks can widen discounts abruptly and, when they do, users may refuse to accept certain stablecoins, as seen on several occasions in the past,” said de Cos.

The other property, interoperability, means that users can send and receive funds seamlessly across platforms and networks. Today, stablecoins are distributed across a wide range of blockchains, so even versions of the same token that run on different blockchains aren’t interoperable by default.

The BIS General Manager explained:

Together, these features undermine the network effects that are key to money – the use of money begets its acceptance, and acceptance begets wider use. It is therefore conceivable that under current designs stablecoins remain a “niche” instrument.

While current stablecoin systems may fall short of the requirements of a widely accepted payment instrument, de Cos noted that they have the potential to significantly enhance cross-border payments. But the opportunities provided by fiat-tied cryptocurrencies don’t come without challenges; the BIS head cautioned that these assets can affect credit supply, financial stability, and monetary and fiscal policy.

Currently, the fiat-pegged coins have a combined valuation of over $320 billion, which is a new all-time high.

At the time of writing, Bitcoin is trading around $75,000, up more than 6% over the past week.