BIS Chief Argues Stablecoins Unreliable for Mass Payments, Backs Tokenized Deposits

The head of the Bank for International Settlements (BIS) has argued that stablecoins are not a reliable payment method for large-scale applications, positioning tokenized deposits as a more advantageous way to leverage the underlying technology. Speaking at the Federal Reserve's Jackson Hole economic symposium, BIS President Pablo Hernández de Cos outlined a series of fundamental problems with stablecoins while suggesting they could coexist with tokenized deposits for specialized, niche uses.

Risks to Financial Stability

De Cos detailed several risks that privately-issued stablecoins pose to the global financial system. While acknowledging that proponents believe they could lower sovereign borrowing costs, he warned of potential negative consequences for the broader economy.

Key concerns he raised include:

• Higher Bank Funding Costs: Widespread adoption of stablecoins could lead to an outflow of funds from the traditional banking system. This would likely increase banks' funding costs, which could then be passed on to ordinary borrowers through higher interest rates.
• Undermining Monetary Unity: The existence of multiple, non-interoperable stablecoins fragments the payment system. Users would incur costs when switching between different products, undermining the principle of a single, unified currency.
• Illicit Finance: A lack of platform interoperability and inconsistent application of anti-money laundering (AML) controls creates significant risks for illicit financial activities.

Threat of 'Digital Dollarization'

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The BIS chief also highlighted the growing threat to monetary sovereignty, particularly in jurisdictions outside the United States. The increasing popularity of U.S. dollar-pegged stablecoins could lead to a phenomenon he termed "digital dollarization."

He warned that if foreign borrowers shift heavily towards dollar-based stablecoins, it could weaken the sovereignty of their national currencies. This would reduce the effectiveness of domestic monetary policy and tie local economic conditions more closely to external policy decisions.

Tokenized Deposits Seen as a Better Path

In contrast, de Cos presented tokenized deposits as a more direct and safer route to modernizing payments. "Tokenized deposits offer a more direct path to harness the benefits of tokenization while preserving the fundamental pillars of the monetary system," he stated.

He envisions a system where tokenized deposits, which are digital representations of commercial bank deposits on a distributed ledger, handle the majority of daily payment functions. However, he also noted that this alternative is not without its own challenges, including the need to resolve issues related to interoperability, governance structures, and legal frameworks for settlement.