Today the Bank for International Settlements (BIS), the central bank to central banks, released a chapter of its Annual report, “The next-generation monetary and financial system,” outlining its vision for a tokenized economy. The BIS sees tokenized deposits dominating retail payments with wholesale central bank digital currencies (wCBDC) enabling interbank settlement, but argues stablecoins lack the fundamental features of sound money.
Why stablecoins are flawed
The BIS identifies three critical flaws in stablecoins: they lack singleness, elasticity and integrity. Singleness refers to universal acceptance without question, requiring token holders to know they can always exchange $1 for a dollar rather than 99 cents or less. The BIS says this is only possible through central bank money settling bank transactions.
Elasticity means central banks and commercial banks can grant credit to expand the money supply. “Where you have very complex interlocking payment obligations, if you had to wait for the incoming payments before you have sufficient liquidity to execute your own outgoing payment, that would be a recipe for gridlock,” explained Hyun Song Shin, the Head of the Monetary and Economic Department at the BIS during a media briefing.
“That feature cannot be satisfied with stablecoins because stablecoins need the backing reserves upfront. So unless you actually have the balances
already in your wallet, you cannot execute that payment,” said Mr Shin. “So I think for large value payments that elasticity is going to be absolutely key.” (Italics is our emphasis.)
The integrity problem stems from stablecoins being “digital bearer instruments on borderless public blockchains” that have become “the go-to choice for illicit use to bypass integrity safeguards,” according to the report.
Beyond these fundamental issues, the BIS warns stablecoins threaten monetary sovereignty through dollarization and could destabilize government debt markets when issuers sell reserves en masse during crises.
Unified Ledger plans
Instead of stablecoins, the BIS promotes its Unified Ledger concept where central banks and commercial banks transact on a single network with tokenized deposits from commercial banks serving customers. The latest paper acknowledges a single ledger isn’t always practical, especially with multiple central banks involved, so it envisions interconnected subnets or blockchain layers.
Project Agorá exemplifies this approach, bringing together seven central banks and 43 private institutions to explore tokenizing correspondent banking for more efficient cross border payments. However, the project remains exploratory and is just moving from concept to prototype.
“There is tremendous impetus that’s coming from our private sector partners,” Mr Shin said about the project’s momentum.
Multi central bank initiatives face governance and data sovereignty challenges, with each central bank wanting final authority over its currency. Project Jura between Switzerland and France required two notaries, one for each central bank, to approve franc to euro exchanges.
Stepping back, with the current wave of technical innovations, including blockchain and AI, the establishment of the BIS Innovation Hubs in 2019 to prepare central banks was an important move. The launch was just months after Facebook unveiled its Libra stablecoin plans.
Today stablecoins are having a moment and timing is everything with innovation. For all the dozens of experiments with tokenized deposits, many outside the BIS, only a few standalone offerings have reached the market. Even fewer operate on open permissionless blockchains, which the BIS views with skepticism. Despite all the hard work from the BIS, stablecoins appear to be targeting an open goal for certain mainstream use cases.
