Stablecoins Fall Short as Cornerstone of Monetary System, Central Banks Say

By Renae Dyer

Demand for stablecoins has risen significantly but the crypto assets shouldn't be the mainstay of the future monetary system, a group representing the world's top central banks said.

Stablecoins, a cryptocurrency pegged to a traditional asset class such as the dollar, fall short of the requirements needed to ensure sound monetary arrangements, the annual economic report of Switzerland-based Bank for International Settlements said. The BIS's members include the Federal Reserve, the Bank of Japan and the European Central Bank.

Crypto assets have been the go-to choice for illicit use to bypass safeguards, it said. Individuals' identities are hidden behind wallet addresses, preserving privacy but facilitating illegal use, BIS said. Stablecoins can circulate without issuer oversight, raising concerns about their use for financial crime such as money laundering and terrorism financing.

Stablecoins also lack the settlement function provided by central banks. Central banks act as a final point of settlement for traditional financial payments, ensuring stability and trust.

The BIS also raised concerns about tensions between the promise for stablecoins to be truly stable and the need for a profitable business model that involves liquidity or credit risks.

"Loss of monetary sovereignty and capital flight are major concerns, particularly for emerging market and developing economies," it said.

"If stablecoins continue to grow, they could pose financial stability risks, including the tail risk of fire sales of safe assets."

Stablecoins' future role remains uncertain but they should at best serve a subsidiary role, BIS said.

The BIS suggested policy responses were needed to ensure legitimate use of stablecoins are appropriately regulated and illicit use is blocked to protect the monetary and financial system.

However, it warned that adequate regulation can only go so far in addressing some important structural flaws that are likely to persist.

Write to Renae Dyer at renae.dyer@wsj.com