The Bank for International Settlements (BIS) has taken a closer look at stablecoins and artificial intelligence in its latest annual report, offering a more cautious assessment of how digital tokens function in financial markets.
While the crypto industry has long positioned stablecoins—fiat-pegged tokens—as a foundation for blockchain-based payments, the BIS argues they behave less like money and more like exchange-traded funds (ETFs) or similar investment products.
The report stresses that true money is accepted universally “with no questions asked,” whether as cash or bank deposits. Stablecoins, by contrast, do not consistently meet this standard.
According to the BIS, tokenized fiat instruments often trade slightly above or below their peg, similar to ETFs that fluctuate around net asset value. Redemption is also not always seamless, meaning users may face delays or costs when converting stablecoins back into cash.
“Redemption frictions are common, indicating that current stablecoin designs resemble exchange-traded fund (ETF) shares rather than means of payment,” the report said.
The BIS also highlighted structural differences with traditional banking. Unlike bank deposits, which ultimately settle on central bank balance sheets, stablecoins lack direct access to central bank money and cannot guarantee parity across issuers and networks under all conditions.
Instead, their value depends largely on market confidence in issuers’ reserves and redemption mechanisms rather than an explicit sovereign guarantee.
The report also criticized the “cash-in-advance” model used by stablecoin issuers, where tokens are created only after users deposit equivalent funds. While this ensures full backing, it limits the ability to expand money supply in the way commercial banks do through credit creation.
FX risks and dollarization
The BIS further warned that stablecoins may be reinforcing dollarization rather than challenging fiat dominance. It pointed to rising flows from non-dollar currencies into USD-pegged tokens, which can weaken local currencies and increase pressure in foreign exchange markets.
This dynamic resembles traditional deposit dollarization, where households shift savings into foreign currencies during periods of inflation or macroeconomic stress. Once established, such trends can prove persistent.
However, stablecoins may accelerate the process due to their speed and global accessibility. The BIS also noted that arbitrage between crypto and traditional FX markets can become strained, potentially raising costs in FX swap markets.
While some countries have introduced restrictions on stablecoin use, the BIS cautioned that enforcement may be limited, given the ease of transferring tokens through self-custodied wallets and decentralized infrastructure.
As a result, traditional capital controls that work in the banking system may be significantly less effective in a borderless, token-based financial environment.
