A new BIS research paper finds of the 68 stablecoins 'pegged' to the value of a specific asset, not one of them has been able to maintain parity with their pegs at all times

The 68 'stablecoins' in circulation today do not meet the "key criteria" for being a safe store of value and a trustworthy means of payment in the "real economy", according to a new report from the Bank for International Settlements (BIS).

A stablecoin is a type of cryptoasset that aims to stabilise its value relative to other conventional assets, including central bank money. One of the first was Tether, in 2014. Within a decade of the first stablecoin launch, the number of “active” stablecoins, ie those having a positive market capitalisation, grew to above 60, with Tether, USD Coin and Binance USD being the most prominent ones to date.

The report's authors Anneke Kosse, Marc Glowka, Ilaria Mattei and Tara Rice have examined whether stablecoins have stayed true to their name in terms of being “stable”.

The authors say that by classifying stablecoins into four distinct types, they show that, while stablecoins backed by fiat currency, commodities or other cryptoassets have generally been less volatile than traditional cryptoassets, not one of them has been able to maintain parity with its peg at all times.

"One thing is certain: a stablecoin that never breaks its peg has yet to emerge. The evidence suggests that, to date, not one of the current stablecoins assessed in this paper has been able to assure full price stability.

"This applies to all types of stablecoin, irrespective of their size or their type of reserve assets. Moreover, there is no guarantee that the stablecoin issuers have the assets required to be able to redeem the coins at all times.

"The lack of transparency regarding the availability and quality of these reserves may undermine trust in stablecoins’ credibility and their ability to maintain their peg.

"For these reasons, the stablecoins we see today do not live up to their name, nor do they meet the key criteria for being a safe store of value or a trustworthy means of payment for the real economy."

Our Reserve Bank (RBNZ) has done a significant amount of work on cryptoassets as part of its Future of Money programme. The RBNZ says it's not proposing regulation yet, but is increasing its monitoring of stablecoins and cryptoassets (cryptocurrencies), and suggests there could be "real advantages to harmonising cryptoasset regulation" globally. 

The RBNZ has also taken a particular interest in stablecoins and has previously warned that if there was to be a rapid and widespread uptake related to a stablecoin backed by foreign currencies, "there would be a potential risk of inadvertent ‘dollarisation’ where the money used in New Zealand (and domestic prices) would be denominated in foreign currency and not the New Zealand dollar".

Basel, Switzerland-based BIS was established in 1930, and is owned by 63 central banks, including the RBNZ. BIS describes its mission as to support central banks' pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks.

In the latest paper, the BIS authors say that given stablecoins are claimed to provide a stable alternative to other cryptoassets, they have a greater potential to become a widely used method of payment, store of value and unit of account.

'Significant turbulence'

"Yet, despite the lauded benefits, stablecoins have experienced significant turbulence, especially in 2022 and early 2023. In the first half of May 2022, the crypto ecosystem was shaken up by the crash of various cryptoassets, including Terra’s stablecoin TerraUSD, the third largest stablecoin at the time. A few months later, in November, the centralised crypto exchange FTX filed for bankruptcy and March 2023 saw the collapse of Silicon Valley Bank, a lender and custodian to many crypto service providers. These events had a discernible impact on the cryptoasset market, and they brought the growth of the stablecoin market to a halt."

The report says that to date, the majority of stablecoins have been pegged to a single asset, most typically sovereign currencies, such as the US dollar or euro, but also commodities such as gold or another cryptoasset. The information in the report is based on the status as of September 30, 2023 and contains information on 68 stablecoins, 20 of which are fiat-backed, 28 crypto-backed, seven commodity-backed and 13 unbacked.

"As the introduction of stablecoins approaches its tenth anniversary, many questions remain unanswered," the report authors say.

They say that to answer questions about the uses and users of stablecoins, significant data gaps must first be addressed.

"The analysis in this paper is based mainly on information from commercial data providers and stablecoins’ websites. More granular data are required to better understand who uses stablecoins, for which activities and purposes, and how often. While blockchain transactions are, in theory, transparent, information on actual usage is difficult to obtain.

"Moreover, stablecoin issuers typically do not provide public information on the usage of their stablecoins. An important consequence of this data gap is that the true risks of stablecoins may be underestimated," they say.

"Not only does this hamper authorities’ ability to take informed decisions and develop evidence-based policies, but it also makes it difficult for them to intervene, if necessary, in the case of a run or other loss-of-confidence events that may harm consumers."

'Appropriate regulation and supervision essential'

The report says appropriate regulation and supervision are essential, not only to serve as a legal basis for the collection of more detailed data, but also to prevent stablecoins from "compromising the safety and efficiency of payments and the financial system more broadly".

"Important steps have already been taken in this direction. The Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have been engaged in extensive international policy and standard-setting work on the regulation, supervision and oversight of stablecoin arrangements."

The report authors say that despite stablecoins "not being truly stable", they are still around, and new ones are still being issued.

They say the global regulatory community "cannot afford to just let crypto 'burn out'".

"Continued monitoring with vigilance and future-proofing policy are in order, given the rapidly evolving and elusive nature of this market."

To address the challenges related to stablecoins, regulation alone may not be sufficient, the report says.

"This paper covered a number of shortcomings but was not exhaustive in its reviews. Other shortcomings include aspects related to competition, consumer protection, data privacy and anti-money laundering/combating the financing of terrorism. Further, stablecoins could undermine the singleness of money and lead to a fragmented and fragile monetary system.

"To address these challenges in a holistic manner, regulation alone may not suffice. Moreover, not all jurisdictions will seek to regulate stablecoins. In fact, there are divergent policy approaches to stablecoins across jurisdictions: some jurisdictions have made it clear that they will not accept stablecoins because of the potential risks to monetary sovereignty, financial stability and seigniorage income; others choose to regulate stablecoins to address these risks, acknowledging the potential roles that stablecoins and their underlying technology could play in future payment ecosystems in their jurisdictions."

'Complementary efforts'

The report says complementary private or public sector efforts, such as improvements in existing payment infrastructures and exploration or the development of central bank digital currency (CBDC), may help to offer the legitimate benefits in payments and financial services that the public seeks.

"For example, if the use of stablecoins is mainly driven by a demand for cheaper cross-border payments, similar benefits may be offered by interlinking today’s fast payment systems.

"If stablecoins are used for reasons of programmability and instant settlement, then CBDCs could satisfy this demand while offering the safety of central bank money."

Further analytical work on the market structure of stablecoins, their stabilisation mechanisms and the key drivers for their adoption will provide a basis for robust policy work, the report says.

"Jurisdictions must move quickly to (i) work through international standard-setting bodies to continue to improve the guidance or standards on stablecoins, including on international cooperation; (ii) determine their policy stance (regulate or ban); (iii) if regulating, then act expeditiously to put in place a holistic regulatory framework, including the means to fill the substantial data gaps."

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