BIS Says Stablecoins Can’t Function Without Central Bank Backing

The Bank for International Settlements has argued that stablecoins cannot reliably function as payment instruments without the backing of central bank money, in a chapter of its Annual Economic Report published June 23. The report says stablecoins fail a core monetary property called “singleness” — the guarantee that a unit of money can always be redeemed at par with central bank money — and calls for coordinated regulation alongside an alternative model based on tokenized central bank reserves.

Four structural weaknesses identified

The chapter, part of Chapter III of the report, was co-authored by Frank Smets and Gaston Gelos. Gelos, who serves as the BIS’s Deputy Head of the Monetary and Economic Department, said on a Reuters podcast that stablecoins and other tokens depend on the stability central banks provide in order to function smoothly, according to Crypto Briefing.

The BIS lays out four deficiencies it sees in stablecoins running on public, permissionless blockchains. First, redeemability at face value is not always guaranteed. Second, stablecoins lack “liquidity elasticity” — the ability to expand or contract supply in response to market stress the way central bank money can. Third, interoperability between different stablecoin ecosystems remains fragmented. Fourth, resilience against financial crime on open blockchains remains a persistent weak point.

Warnings on monetary sovereignty and bank funding

The report warns that widespread adoption of dollar-denominated stablecoins could erode monetary sovereignty in emerging markets, where local currencies may face competition from a dollar-linked alternative circulating outside traditional banking channels.

The BIS also flags risks to conventional banking. If depositors move funds out of bank accounts and into stablecoins, banks could lose a cheap source of funding, which in turn could constrain their ability to extend credit. Despite these concerns, the BIS projects that the overall impact on economic growth from this shift would be modest.

A “unified ledger” as the proposed alternative

Rather than dismissing tokenization outright, the BIS proposes folding its benefits — programmability, atomic settlement and composability — into the existing two-tier monetary system through what it calls a “unified ledger.” In this model, tokenized central bank reserves would form the base layer, supplying the singleness guarantee that stablecoins currently lack, while commercial banks and other regulated entities would issue tokenized deposits and payment instruments on top of that foundation.

The report points to Project Agora, a BIS innovation hub initiative exploring public-private collaboration on cross-border payments, as an example of this approach being tested in practice. Alongside the unified ledger proposal, the BIS also called for coordinated regulatory measures targeting stablecoins as they currently operate.

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