BIS Warns Stablecoins Could Fragment the Global Financial System

The Basel-based institution stated that privately issued digital tokens do not meet the standards required for sound money and urged policymakers to speed up efforts toward developing tokenized versions of central bank and commercial bank money.

The rapid growth of stablecoins was warned by the Bank for International Settlements to pose risks of fragmenting the global monetary system and eroding sovereign control over monetary policy, while central banks and the financial sector were urged to speed up the development of tokenized forms of central bank and commercial bank money as a more secure alternative.

In its Annual Economic Report released on Sunday, a critical evaluation of the nearly $316 billion stablecoin market was presented by the Basel-based institution, which argued that fiat-pegged tokens do not possess the institutional characteristics necessary to function as safe and dependable money on a large scale.

Structural weaknesses in reserve asset management were highlighted by the BIS, which also warned that a substantial shift from commercial bank deposits into privately issued digital tokens could weaken bank funding and limit the availability of credit for the broader economy.

The report also signals to policymakers that the existing regulatory framework for stablecoins could prove inadequate if private digital currencies continue to expand. Rather than viewing stablecoins as a lasting pillar of the future monetary system, a more resilient route toward payment modernization and monetary stability was identified by the BIS through the combination of tokenized commercial bank deposits and tokenized central bank money operating on regulated infrastructures.

Particular attention is given in the report to “stablecoin dollarization,” referring to the increasing use of dollar-pegged stablecoins in countries with weaker local currencies. According to the BIS, monetary sovereignty could be weakened, the effectiveness of domestic monetary policy could be diminished, bank intermediation could be reduced, and exposure to unstable cross-border capital flows could be increased by this trend, especially in emerging market economies.

BIS Raises New Concerns Over the Limitations of Public Blockchains

One of the strongest criticisms yet of public permissionless blockchains such as Bitcoin and Ethereum is also delivered in the report by the BIS. It argues that the requirements for scalability, legal accountability and settlement finality expected from systemically important financial infrastructure are difficult to satisfy for decentralized networks that rely on distributed validation and operate without a central governing authority.

The economics of decentralized consensus are placed at the center of the BIS critique. It is argued in the report that validators on public permissionless blockchains are rewarded through transaction fees that increase alongside network activity, causing congestion, slower confirmation periods and rising costs to become structural elements of the system rather than short-term technical issues. According to the BIS, the efficiency and network effects required for a unified monetary system are undermined by these characteristics.

The Basel-based institution further maintains that public permissionless blockchains do not possess the transparent governance and accountability structures required by institutional finance. According to the BIS, major challenges are faced by these networks in supporting large-scale regulated financial activity because no clearly identifiable entity is responsible for preserving system integrity, settling disputes or ensuring adherence to financial compliance standards.

Rather than opposing tokenization itself, a “unified ledger” framework is being promoted by the BIS, combining tokenized central bank money, tokenized commercial bank deposits and tokenized financial assets on programmable platforms that operate within established legal and regulatory structures.

By retaining the advantages of tokenization, such as programmable transactions and quicker settlement processes, while preserving the institutional framework of the current monetary system, greater efficiency can be achieved in financial markets without compromising monetary stability, financial integrity or public confidence, according to the BIS.