Latest news with #BankforInternationalSettlements
Coin Geek
a day ago
- Business
- Coin Geek
BIS finds tokenization is the future of financial system
Getting your Trinity Audio player ready... In a report published on June 24, the Bank for International Settlements (BIS), an institution made up of central banks from around the world, claimed that fiat-pegged stablecoins 'fall short of requirements to be the mainstay of the monetary system' as they fail the three key tests of singleness, elasticity, and integrity. However, it argued that tokenization does meet this test. In a 'special chapter' of the BIS's Annual Economic Report 2025, titled 'The next-generation monetary and financial system,' the BIS concluded that, building on the proposal for a unified ledger, the 'trilogy' of tokenized central bank reserves, commercial bank money and government bonds is 'the next logical step to deliver profound change for the financial system.' The report argued that tokenization can enhance efficiency and open new possibilities in cross-border payments, securities markets, and beyond while maintaining the key principles of sound money. 'Tokenisation represents a transformative innovation to both improve the old and enable the new. It paves the way for new arrangements in cross-border payments, securities markets and beyond,' wrote the BIS. 'Tokenised platforms with central bank reserves, commercial bank money and government bonds at the centre can lay the groundwork for the next-generation monetary and financial system.' However, while the report was effusive in its praise for the possibilities of tokenization, it was less enthusiastic about stablecoins, suggesting that they fall short of requirements to be the mainstay of the monetary system when set against the three key tests of singleness, elasticity, and integrity. This test is how the BIS judges the suitability of a payment system. The ' singleness of money ' refers to whether money can be issued by different banks and accepted by all without hesitation, otherwise known as 'acceptance for payment at par'; elasticity refers to whether money provides the flexibility to meet the need for large-value payments in the economy, 'so that obligations are discharged in a timely way without gridlock taking over'; and integrity refers to a system's ability to safeguard against financial crime and other illicit activity. According to the BIS, stablecoins do not meet any of these three criteria and are, therefore, not suitable to become the cornerstone of the next financial revolution. How stablecoins fall short According to BIS, stablecoins failed the first test, the singleness on money, partly because their value can depend on the relative 'creditworthiness' of their issuers and partly because stablecoins traded in secondary markets at an 'exchange rate' can deviate from par—meaning a situation can occur where different stablecoin that are supposed to be equivalent do not trade at equal value and can no longer be accepted at face value. 'Stablecoin holdings are tagged with the name of the issuer, much like private banknotes circulating in the 19th century Free Banking era in the United States. As such, stablecoins often trade at varying exchange rates, undermining singleness,' wrote the BIS. When it comes to elasticity, stablecoins failed the test because assets, such as Tether's USDT—the world's largest stablecoin by market cap—can be backed by a 'nominally equivalent amount of assets,' which means any 'additional issuance requires full upfront payment by holders' imposing a 'cash-in-advance constraint.' In other words, the stablecoin issuer's balance sheet cannot be expanded at will; any additional supply of stablecoins requires full upfront payment by its holders, which differs from banks, which can 'elastically expand and contract their balance sheets within regulatory limits.' Finally, stablecoins have been well publicized and have 'significant shortcomings when it comes to promoting the integrity of the monetary system' and are prone to Know Your Customer (KYC) and anti-money laundering (AML) compliance weaknesses. The BIS particularly highlighted the ability of digital asset mixers to obfuscate the origin of money and hamper traceability, as well as blockchain's propensity for anonymity, or pseudoanonymity, which hampers KYC efforts. Despite these critiques, the report wasn't wholly dismissive of the potential of stablecoins, noting that they offer certain advantages, such as programmability, pseudonymity, and 'easy access for new users.' In addition, their 'technological attributes mean they can potentially offer lower costs and faster transaction speed,' particularly for cross-border payments. 'It remains to be seen what role innovations like stablecoins will play in the future monetary system,' wrote the BIS. 'But stablecoins do not stack up well against the three desirable characteristics of sound monetary arrangements and thus cannot be the mainstay of the future monetary system.' There was, however, another asset type and financial system that did stack up well. Tokenization for the win As pessimistic as the report was in its appraisal of stablecoins as the next big thing in international payment systems, it was equally optimistic in its take on tokenization—the digital representation of assets on programmable platforms. 'Tokenisation stands to be the next logical step in the evolution of money and payments,' said the BIS, adding that it 'integrates messaging, reconciliation and settlement into a single seamless operation, and can transform cross-border payments and securities markets, ushering in a new era for the financial system.' Specifically, the report pointed to recent proposals for a unified ledger that provides a blueprint for the tokenized financial system. Key elements of the blueprint are tokenized central bank reserves, tokenized commercial bank money, and other tokenized claims on financial and real assets—all 'brought together in a new type of financial market infrastructure.' The report argued that the unified ledger can transform intermediary interactions, particularly when it comes to cross-border payments and, by combining programmability and transaction bundling, it can integrate and automate sequences of financial transactions. 'This eliminates delays and reduces manual interventions and reconciliations arising from the traditional separation of messaging, clearing and settlement,' noted the report. According to the BIS, tokenization also enables the joint execution of three previously separate steps: the debiting of the payer's account, the crediting of the receiver's account, and settlement on the central bank balance sheet. This allows for the 'synchronous exchange' of assets so that each transfer occurs only upon the transfer of the others. In terms of singleness—one of the areas stablecoins fell down—the report suggested that singleness on private tokenized money and cash would be supported in the same way it is now for commercial bank deposits, as long as all private tokenized money issuers complied with the same regulatory standards and had access to the same safeguards. It added that singleness between the private tokenized money issued by non-banks and cash could also be maintained under the proper arrangements. Tokenization can also utilize smart contracts—computer programs that run on a blockchain and automatically trigger when certain pre-agreed conditions are met, without the need for human intervention—which enables central banks to instantly create and adjust their tools, such as deploy new facilities and adjust interest rates or collateral requirements. In this way, 'tokenisation could offer flexibility and speed in monetary policy operations' as well as 'improve operational efficiency and promote automation in back office tasks.' Finally, as tokenized platforms could—in principle—operate continuously, smart contracts could support extended or even 24/7 market operations. 'Tokenisation of deposits and central bank money means that both the primary means of payment as well as the settlement function of central bank money can be integrated seamlessly on the same programmable platform,' said Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic Department at the BIS, in a June 24 press release. 'It has the potential to transform securities markets and its application to correspondent banking is especially promising.' This sentiment was echoed by Agustín Carstens, General Manager of BIS, who commented: 'The next-generation monetary and financial system combines the time-tested principles of trust in money underpinned by central banks with the functionality unlocked by tokenisation. This system is poised to deliver substantial improvements to current practices and to enable entirely new economic arrangements.' Amongst all the praise, the BIS did acknowledge that the transition to a fully tokenized financial system would not be without its challenges. Interoperability between existing account-based systems and emerging tokenized infrastructures must be ensured; changes to existing systems will be needed, including adjustments to booking and reconciliation processes or messaging standards; fragmentation across both legacy and new networks could pose a challenge; and the emergence of tokenized repo transactions adds to demands on sound collateral management. However, overall, the BIS concluded that tokenization represents a 'transformative innovation to both improve the old and enable the new' and one that could well be the basis for the next-generation monetary and financial system. Watch | Rediscovering Blockchain: Here's how you build trust at scale title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" referrerpolicy="strict-origin-when-cross-origin" allowfullscreen="">
Crypto Insight
2 days ago
- Business
- Crypto Insight
BIS says stablecoins fail as money, calls for strict limits on their role
A new report from the Bank for International Settlements (BIS) challenged the notion that stablecoins can serve as money in a modern financial system. According to the BIS Annual Economic Report 2025, stablecoins fail the fundamental tests of 'singleness,' 'elasticity' and 'integrity,' three critical criteria that define effective monetary instruments. The BIS described stablecoins as 'digital bearer instruments' that resemble financial assets more than actual money. 'Stablecoins perform poorly when assessed against the three tests for serving as the mainstay of the monetary system,' the report said. Unlike central bank-backed money, which is accepted 'at par' and requires no background checks, private entities issue stablecoins and often trade at fluctuating rates. This undermines the core principle of monetary singleness, the report claimed. Stablecoins fail elasticity and integrity tests Elasticity, the second test, is crucial for absorbing shocks and meeting large-value payment demands, BIS said in its report. It pointed out that 'any additional supply of stablecoins thus requires full upfront payment by its holders,' likening it to a 'strict cash-in-advance setup' that contrasts with the flexibility of modern banking systems, where central banks provide liquidity as needed. The third and perhaps most damning failure lies in the area of integrity. The report claimed that stablecoins' design, especially those transacted via unhosted wallets on public blockchains, makes them prone to financial crime. 'Stablecoins have significant shortcomings when it comes to promoting the integrity of the monetary system,' the BIS noted, emphasizing their vulnerability to money laundering, sanctions evasion and terrorist financing. Stablecoins should have a limited role While acknowledging the continued demand for stablecoins due to features like cross-border accessibility and lower transaction costs, the BIS argued that they should only play a limited, well-regulated role. 'Society can re-learn the historical lessons about the limitations of unsound money,' the report cautioned. 'Bold action by central banks and other public authorities can push the financial system along the right path, in partnership with the financial sector.' Circle, the company behind USDC, saw its stock drop more than 15% on Tuesday after the BIS report, hitting $222. CRCL shares had reached an all-time high of $299 on Monday. Despite its hard take on stablecoins, the BIS report praised tokenization as a 'transformative innovation' for the next-generation monetary and financial system. It said tokenization builds on the current financial system rather than replacing it. Some in the crypto community said it is 'no surprise' that the BIS paper was generally negative on stablecoins, given that it is a 'regulatory body owned by global central banks.' 'The BIS is hysterical in its opposition to crypto,' Jim Walker, chief economist at Aletheia Capital, wrote. 'The first criterion, backed by a central bank, should make it a laughing stock given the historical failures of those institutions around the world.' Source:
Finextra
3 days ago
- Business
- Finextra
BIS report pours cold water on stablecoin hype
They may be the current darling of the financial services world, but stablecoins fall short as a form of sound money and at best may "eventually play a subsidiary role in the hinterland of the financial system," according to the Bank for International Settlement. 0 Stablecoins have seen a surge in interest in recent months, with US regulators paving the way for adoption. big banks exploring rolling out their own tokens, USDC issuer Circle soaring on its market debut, and Citi predicting that the market will hit trillions within five years. Yet, while offering some promise on tokenisation, they are fundamentally flawed, says a report into the next generation monetary and financial system from the BIS, because they "do not stack up well against the three desirable characteristics of sound monetary arrangements and thus cannot be the mainstay of the future monetary system". These characteristics are the ability to deliver singleness of money (acceptance for payment at par), elasticity (timely discharge of obligations, preventing gridlock) and integrity (safeguarding against financial crime). Therefore, "besides acting as a gateway to the crypto ecosystem, their future role is unclear," says the report. In fact, without regulation they could be actively damaging, posing a risk to financial stability and monetary sovereignty. The BIS instead predicts that a tokenised unified ledger incorporating central bank money, commercial bank deposits and government bonds will lay the foundations of a tokenised monetary and financial system based on the time-tested principles of sound money. This trilogy can boost efficiency and open new possibilities in cross-border payments, securities markets and beyond, while maintaining the key principles of sound money that stablecoins fail in: singleness, elasticity and integrity. Hyun Song Shin, head, monetary and economic department, says: "Tokenisation of deposits and central bank money means that both the primary means of payment as well as the settlement function of central bank money can be integrated seamlessly on the same programmable platform. It has the potential to transform securities markets and its application to correspondent banking is especially promising." The BIS is already exploring this through Project Agorá, a collaboration led by the group with seven central banks and 43 private sector institutions to "test and develop tokenisation as the backbone of the future monetary and financial system," says Andréa M Maechler, acting head, BIS Innovation Hub. Read the report.
Times
4 days ago
- Business
- Times
Stablecoins threaten global financial stability, central banks warn
The growing use of stablecoins threatens global financial stability and the monetary sovereignty of countries, the Bank for International Settlements has warned, in a rebuke of US policy supporting the adoption of the digital assets. Known as the 'central bank of central banks', the BIS issued a pointed criticism of stablecoins, which are a form of digital currency pegged to traditional assets such as the dollar or commodities. It said stablecoins had 'some attributes of money' but warned that they 'perform poorly when assessed against the three tests for serving as the mainstay of the monetary system'. 'Stablecoins as a form of sound money fall short and without regulation pose a risk to financial stability and monetary sovereignty,' it said. The BIS's intervention comes after the US Senate passed a bill known as the 'Genius Act' that would create a legal framework for the digital assets and require them to be backed by liquid assets such as the dollar or US government bonds. The BIS said the main pitfall of stablecoins was their failure to meet the test of monetary 'singleness', where the value of one asset is always guaranteed as it is with dollars or the pound, which are underwritten by their issuing central banks. • Gerard Lyons: The dollar is declining, but what will replace it? Stablecoins are generally considered safer and less volatile than cryptocurrencies such as bitcoin but the sector was thrown into turmoil with the collapsing value of terraUSD in 2022. Terra, which was pegged one-to-one with the US dollar, had about $50 billion of its market capitalisation wiped out. As part of its latest annual report to be published this week, the BIS said: 'Society has a choice. The monetary system can transform into a next-generation system built on tried-and-tested foundations of trust and technologically superior, programmable infrastructures. 'Or society can re-learn the historical lessons about the limitations of unsound money, with real societal costs, by taking a detour involving private digital currencies. If stablecoins continue to grow they could pose financial stability risks, including the tail risk of fire sales of safe assets.' The BIS instead urged central banks to tokenise their currencies to counter the threat of stablecoins. The bank is working with seven big central banks — including the Bank of England, US Federal Reserve, Bank of France and Bank of Japan — and a number of commercial banks to help to create a network of tokenised central bank payments, known as Project Agora.
The Star
4 days ago
- Business
- The Star
Central bank body BIS delivers stark stablecoin warning
FILE PHOTO: The tower of the headquarters of the Bank for International Settlements (BIS) is seen in Basel, Switzerland March 18, 2021. REUTERS/Arnd Wiegmann/File Photo LONDON (Reuters) -The Bank for International Settlements issued its starkest warning yet on the risks posed by stablecoins and urged countries to move rapidly towards the tokenisation of their currencies. The BIS, often dubbed the central bankers' central bank, outlined its concerns, including stablecoins' potential to undermine monetary sovereignty, transparency issues and the risk of capital flight from emerging economies. It comes less than a week after the U.S. Senate passed a bill to create a regulatory framework for U.S.-dollar-pegged stablecoins, a move which, if rubberstamped by the House, is expected to fuel a further explosion in their popularity. Stablecoins are a type of cryptocurrency designed to maintain a constant value, usually a 1:1 dollar peg, backed by real-world assets such as U.S. Treasuries or gold. Dollar-pegged coins currently account for 99% of the market, which is estimated to have over $260 billion worth of coins in circulation. "Stablecoins as a form of sound money fall short, and without regulation pose a risk to financial stability and monetary sovereignty," BIS said in a early-released chapter of its annual report due to be published on Sunday. Hyun Song Shin, the BIS' Economic Adviser, explained that stablecoins lack the traditional settlement function provided by a central bank with fiat money. He likened them to private banknotes circulating in the 19th-century Free Banking era in the United States. It means they can often trade at varying exchange rates depending on the issuer, undermining the no-questions-asked principle of central bank-issued money. "Singleness is either you have it or you don't," Shin said, also warning of the risk of "fire sales" of the assets backing stablecoins if they collapse, as TerraUSD (UST) and the cryptocurrency LUNA did in 2022. There is also the concern around who controls stablecoins. Tether currently has more than half of the overall stablecoin market, but quit the EU following the introduction of new rules which require stablecoin operators to be licensed by the bloc. "The whole question of disclosure, this is where some of the stablecoins differ," BIS Deputy General Manager Andrea Maechler said. "You will always have the question about the quality of the asset backing. Is the money really there? Where is it?" BOLD ACTIONS The BIS wants central banks to go down the route of tokenised "unified ledger" incorporating central bank reserves, commercial bank deposits and government bonds. It would mean central bank money remains both the primary means of global payment and that currencies and bonds from around the world could effectively be integrated into the same "programmable platform". Tokenisation is aimed at creating a digitalised central bank system that settles payments and securities trades almost instantaneously and more cheaply by cutting the need for certain time consuming checks, as well opening up new functionality. It can also make the system more transparent, resilient and interoperable and may protect the system from some of the more unpredictable elements of cryptocurrencies. There would be a number of key issues to overcome, including who gets to set the rules governing the platform and that individual countries are likely to want to retain significant control of how and who uses their currencies. "Realising the full potential of the system requires bold action," the outgoing head of the BIS, Agustin Carstens, said. (Reporting by Marc Jones, Additional reporting by Elizabeth Howcroft, Editing by Louise Heavens)
