Stablecoins are unstable? The "central bank of central banks," BIS warns: Stablecoins pose multiple systemic risks

The "central bank of central banks," the Bank for International Settlements (BIS), has issued a stern warning about the risks of stablecoins and urged central banks around the world to accelerate the digitalization of their currencies. On Tuesday, the BIS warned in an early chapter of its annual report, set to be released on Sunday: Stablecoins fall short as a reliable form of currency and pose risks to financial stability and monetary sovereignty in the absence of regulation. This warning comes at a sensitive time, less than a week after the U.S. Senate passed a bill to create a regulatory framework for stablecoins pegged to the U.S. dollar. The warning directly impacts market sentiment. Major stablecoin issuers like Circle saw their stock prices pressured, with U.S. stocks opening down 7%. Currently, dollar-pegged stablecoins account for 99% of the stablecoin market, with a total market circulation value exceeding $260 billion. Systemic Risks Raise Regulatory Concerns The BIS believes that stablecoins pose multiple systemic risks, including the potential to undermine monetary sovereignty, transparency issues, and the risk of capital flight from emerging markets. BIS economic advisor Hyun Song Shin stated that stablecoins lack the traditional settlement functions provided by central bank fiat currencies, similar to private bank notes circulated during the 19th-century U.S. free banking era, which could trade at different rates depending on the issuer. He also warned that if stablecoins collapse, the assets backing them could be "fire-sold," similar to what happened with TerraUSD (UST) and the cryptocurrency LUNA in 2022. Additionally, the control of stablecoins is also a major concern. Tether currently holds over half of the stablecoin market but withdrew from the EU after new regulations requiring stablecoin operators to obtain licenses were introduced. BIS Deputy General Manager Andrea Maechler emphasized: Disclosure issues are a key difference for stablecoins. The quality of asset backing, whether the funds truly exist, and where they are held are ongoing concerns. Central Banks Should Take "Bold Action" In the face of stablecoin risks, the BIS suggests that central banks should take "bold action" to advance digital central bank systems, integrating central bank reserves, commercial bank deposits, and government bonds. This system aims to ensure that central bank currencies maintain their status as the primary means of global payment while integrating the currencies and bonds of countries worldwide into a single "programmable platform." Digital technology can enable near-instant settlement of payments and securities transactions, reducing costs by minimizing time-consuming checks and opening up new functionalities