Corporate Counsel Daily, BIS report warns stablecoin proliferation could undermine core properties of sound money, (Jun 25, 2025)

By Shashi Kant, BALLB, LLM

Rapid stablecoin expansion threatens money’s singleness, elasticity and integrity, risking fragmentation, liquidity constraints and reduced financial crime controls, notes the report.

The Bank for International Settlements (BIS) Annual Economic Report 2025 examines the evolving landscape of digital money and highlights potential challenges posed by the growth of stablecoins. According to the report, stablecoins offer programmable features and 24/7 accessibility, yet their rapid proliferation raises questions about the foundational properties of sound money, singleness, elasticity and integrity.

Integrity considerations. The BIS report notes that integrity, the assurance that money is not misused for illicit activities, relies on transparent identification and monitoring of participants. Stablecoins operating on public blockchains permit pseudonymous transactions, which can complicate efforts to enforce anti-money-laundering (AML) and know-your-customer (KYC) requirements. The report observes that while analytics tools and post-transaction freezes help trace funds, mixers and unhosted wallets can reduce transaction traceability. As a result, stablecoins may form parallel payment networks that function outside established regulatory frameworks, potentially limiting authorities’ capacity to detect or deter financial crime.

Singleness and private-issuer risks. Singleness refers to money’s ability to be accepted at face value without additional checks. The report explains that central bank money, backed by the public sector, is inherently “information-insensitive,” meaning payees need not assess issuer creditworthiness. In contrast, stablecoins represent claims on private issuers and can trade at different exchange rates, similar to historical examples of free-banking notes. These variations can introduce uncertainty about redemption value when tokens from different issuers circulate side by side.

Elasticity constraints of stablecoins. Elasticity describes the ability of settlement assets to adjust in response to changing transaction demands. The BIS report highlights that central banks and commercial banks collaborate to supply intraday liquidity and deposit money as needed, ensuring high-value payments proceed without delay. Stablecoins, by design, require full upfront backing; issuing new tokens depends strictly on incoming funds. This cash-in-advance model limits stablecoins’ capacity to expand or contract elastically, which could present challenges during periods of elevated transaction volumes or liquidity stress.

Implications for monetary sovereignty. The BIS report considers the potential for stablecoins to affect domestic monetary conditions, particularly in smaller or emerging economies. If residents increasingly adopt dollar-pegged stablecoins, local central banks might experience reduced seigniorage and diminished control over monetary policy. The report indicates that capital flight facilitated by stablecoins could accelerate during periods of economic uncertainty, potentially complicating efforts to maintain financial stability.

Financial stability and market effects. Beyond direct monetary implications, the BIS report explores how stablecoins might influence broader financial markets. Stablecoin issuers often invest reserves in short-term assets, creating potential maturity and liquidity mismatches. Historical episodes in money market funds demonstrate how such mismatches can lead to rapid outflows and de-pegging events under stress. The report cites algorithmic stablecoins as an example of issuers using automated protocols to maintain pegs, noting that these mechanisms have exhibited volatility during market turbulence. These structural dynamics suggest that stablecoins could introduce new channels of systemic risk if they attain significant scale.

Regulatory considerations. The BIS report recommends a technology-neutral, activity-based regulatory approach, summarized as “same activities, same risks, same regulatory outcomes.” Under this framework, stablecoin issuers would be subject to reserve-backing requirements, regular audits and transparency standards comparable to those applied to traditional deposit-taking institutions. The report also indicates that universal KYC and AML compliance should extend to both custodial and non-custodial wallets interfacing with regulated entities, emphasizing the need for consistent oversight across all access points.

Role of Central Bank Digital Currencies (CBDCs). In parallel with regulatory measures, the BIS report notes growing interest among central banks in issuing their own digital liabilities. Tokenised central bank reserves—sometimes referred to as central bank digital currencies (CBDCs)—could provide a secure, programmable alternative to private stablecoins. By anchoring digital payments to a public-sector liability, CBDCs may support singleness, guarantee final settlement at par and operate within existing supervisory frameworks. The report points to pilot initiatives like Project Agorá and Project Pine as examples of how central banks and private firms can collaborate to test integrated platforms for tokenised reserves and commercial bank money.

Experiments and collaborations. The BIS report highlights several ongoing experiments designed to explore technical and operational aspects of tokenisation. Project Agorá, for instance, integrates tokenised central bank money across multiple jurisdictions using a permissioned distributed ledger, with built-in compliance checks and messaging interoperability. Similarly, Project Pine employs smart contracts for automated open market operations. These initiatives aim to clarify how unified ledgers can support atomic settlement, reduce operational costs and maintain regulatory safeguards within a two-tier monetary system.

Future considerations. The BIS report underscores that stablecoin innovation reflects genuine demand for more programmable and accessible payment options. However, it also suggests that without comprehensive oversight, stablecoins are likely to remain supplementary instruments rather than primary settlement assets. The report anticipates that stablecoin markets will continue to evolve, driving both regulatory developments and central bank experimentation.

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