The Concerns from Bank for International Settlements about Stablecoins

The Bank for International Settlements (BIS) has once again raised concerns about stablecoins, specifically criticizing their money market stability mechanisms. In a recent paper, the institution compared stablecoins to Eurodollars and highlighted the inadequate liquidity mechanisms supporting stablecoins’ promise of par settlement. Eurodollars are bank deposits denominated in US dollars outside the country, while stablecoins are on-chain dollar deposits. Both serve as means of settlement in their respective worlds.

Key Differences and Flaws

While the two share similarities in terms of their role as means of settlement, their mechanisms for par price stabilization differ. Stablecoins rely on over-collateralization, “1:1” reserves, and algorithmic trading protocols to maintain par price stabilization. The report pointed out that these mechanisms have deep assumptions and may be superficial, especially when promises to pay come into question. BIS emphasized that stablecoins’ fundamental flaw is seeing the problem through a solvency lens rather than a liquidity lens.

The Need for Liquidity and a Central Entity

The BIS report mentioned that stablecoins lack the necessary liquidity, highlighting the speculative and illiquid nature of crypto markets. In contrast, Eurodollars benefit from central entities like central banks, which have liquidity swap lines to control par deviation during crises. BIS also highlighted the importance of central bank digital currencies (CBDCs) as a solution. CBDCs would be inside the regulatory perimeter and provide explicit and implicit guarantees of bank regulation, addressing the issues raised with stablecoins.

Continued Criticism of Stablecoins

BIS has been consistently critical of stablecoins, with a recent report noting that only seven fiat-backed stablecoins had kept their deviations from the peg below one percent for at least 97% of their life span. The institution continues to question the stability and mechanisms of stablecoins, emphasizing the need for improved liquidity and regulatory oversight.



### News source: coingeek.com

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