Sober thinking under the wave of stablecoins: Why did BIS sound the alarm?

In the wave of digital assets, stablecoins are undoubtedly one of the most eye-catching innovations in recent years.

Author: Aiying Aiying Team

Cover: Photo by Milad Fakurian on Unsplash

In the wave of digital assets, stablecoins are undoubtedly one of the most eye-catching innovations in recent years. With the promise of being pegged to fiat currencies such as the US dollar, they have built a value "safe haven" in the volatile crypto world and are increasingly becoming an important infrastructure in decentralized finance (DeFi) and global payments. The leap in its market value from zero to hundreds of billions of dollars seems to herald the rise of a new form of currency.

However, just as the market was celebrating, the Bank for International Settlements (BIS), known as the "central bank of central banks", issued a severe warning in its May 2025 economic report. BIS clearly pointed out that stablecoins are not real currencies, and behind their seemingly prosperous ecology, there are systemic risks that may shake the entire financial system. This statement is like a basin of cold water, forcing us to re-examine the nature of stablecoins.

Aiying research team aims to deeply interpret the BIS report, focusing on the "triple door" theory of currency proposed by it - that is, any reliable monetary system must pass the three tests of singleness, elasticity and integrity . We will analyze the dilemma of stablecoins in front of these three doors with specific examples, supplement the practical considerations outside the BIS framework, and finally explore where the future of currency digitalization will go.

The first door: The dilemma of singularity - can stablecoins always be "stable"?

The "singleness" of currency is the cornerstone of the modern financial system. It means that at any time and any place, the value of one unit of currency should be exactly equal to the face value of another unit. In simple terms, "a dollar is always a dollar." This constant unity of value is the fundamental premise for currency to perform the three functions of accounting unit, medium of exchange and value storage.

The core argument of the BIS is that the value anchoring mechanism of stablecoins has inherent defects and cannot fundamentally guarantee a 1:1 exchange with legal tender (such as the US dollar). Its trust does not come from national credit, but relies on the commercial credit of private issuers, the quality and transparency of reserve assets, which makes it face the risk of "decoupling" at any time.

In the report, BIS cited the historical " Free Banking Era" (the United States from about 1837 to 1863) as a mirror. At that time, the United States had no central bank, and private banks chartered by each state could issue their own banknotes. These banknotes can theoretically be exchanged for gold or silver, but in reality, their value varies depending on the credibility and solvency of the issuing bank . A $1 bill from a bank in a remote area may be worth only 90 cents in New York, or even less. This chaotic situation has led to extremely high transaction costs and seriously hindered economic development. In the view of BIS, today's stablecoins are a digital replica of this historical chaos - each stablecoin issuer is like an independent "private bank", and whether the "digital dollar" it issues can be truly redeemed is always an unresolved issue.

We don’t need to look back too far in history, the recent painful lessons are enough to illustrate the problem. The collapse of the algorithmic stablecoin UST (TerraUSD) was worth zero in just a few days, wiping out tens of billions of dollars in market value. This incident vividly shows how fragile the so-called "stability" is when the chain of trust is broken. Even for asset-collateralized stablecoins, the composition, auditing and liquidity of their reserve assets have always been questioned. Therefore, stablecoins have already struggled at the first gate of "singleness".

The Second Door: The Tragedy of Elasticity - The "Beautiful Trap" of 100% Reserves

If "singleness" is about the "quality" of money, then "elasticity" is about the "quantity" of money. The "elasticity" of money refers to the ability of the financial system to dynamically create and contract credit according to the actual needs of economic activities . This is the key engine for the self-regulation and sustainable growth of the modern market economy. When the economy is booming, credit expands to support investment; when the economy cools down, credit contracts to control risks.

BIS pointed out that stablecoins, especially those that claim to have 100% high-quality liquid assets (such as cash and short-term Treasury bonds) as reserves, are actually a "narrow bank" model . This model uses users' funds entirely to hold safe reserve assets without lending. Although this sounds very safe, it comes at the expense of completely sacrificing monetary "elasticity."

We can understand the difference through a scene comparison:

• Traditional banking system (with flexibility): Suppose you deposit 1,000 yuan into a commercial bank. Under the fractional reserve system, the bank may only need to keep 100 yuan as reserves, and the remaining 900 yuan can be loaned to entrepreneurs who need funds. The entrepreneur uses the 900 yuan to pay the supplier, who deposits the money into the bank. This cycle repeats itself, and the initial 1,000 yuan deposit generates more money through credit creation in the banking system, supporting the operation of the real economy.
• Stablecoin system (lack of flexibility): Suppose you buy 1,000 units of a stablecoin with $1,000. The issuer promises to deposit all of the $1,000 in a bank or purchase U.S. Treasury bonds as reserves. The money is "locked" and cannot be used for lending. If an entrepreneur needs financing, the stablecoin system itself cannot meet this demand. It can only passively wait for more real-world dollars to flow in, rather than creating credit based on the endogenous needs of the economy. The entire system is like a "stagnant pool" that lacks the ability to self-regulate and support economic growth.

This "inelastic" characteristic not only limits its own development, but also poses a potential impact on the existing financial system. If a large amount of funds flow out of the commercial banking system and turn to stablecoins, it will directly lead to a reduction in the funds available for banks to lend and a shrinking credit creation capacity (similar to the nature of balance sheet reduction). This may trigger a credit crunch, raise financing costs, and ultimately hurt small and medium-sized enterprises and innovative activities that need financial support the most. You can refer to Aiying's recent article " Profitability Questioning under the Halo of "Stability": The Lesson of Hong Kong Virtual Banks' All-Around Losses, Deducing the Dilemma of the Stablecoin Business Model "

Of course, with the large-scale use of stablecoins in the future, stablecoin banks (lending) will emerge, and this credit derivative will flow back into the banking system in a new form.

The Third Door: Lack of Integrity - The Eternal Game between Anonymity and Regulation

The "integrity" of currency is the "safety net" of the financial system. It requires that the payment system must be safe and efficient, and be able to effectively prevent illegal activities such as money laundering, terrorist financing, and tax evasion. This requires a sound legal framework, clear division of responsibilities, and strong regulatory enforcement capabilities to ensure that financial activities are legal and compliant.

BIS believes that the underlying technical architecture of stablecoins, especially those built on public chains, poses a serious challenge to financial "integrity". The core problem lies in anonymity and decentralization, which makes traditional financial regulatory measures difficult to work.

Let's imagine a specific scenario: a stablecoin worth millions of dollars is transferred from one anonymous address to another anonymous address through a public chain. The whole process may only take a few minutes and the handling fee is low. Although the record of this transaction is publicly available on the blockchain, it is extremely difficult to match these addresses composed of random characters with individuals or entities in the real world. This opens the door to the cross-border flow of illegal funds, making core regulatory requirements such as "Know Your Customer" (KYC) and "Anti-Money Laundering" (AML) meaningless.

In contrast, although traditional international bank transfers (such as through the SWIFT system) are sometimes inefficient and costly, their advantage is that each transaction is subject to a strict regulatory network. The remitting bank, the receiving bank, and the intermediary agent bank must comply with the laws and regulations of their respective countries, verify the identities of both parties to the transaction, and report suspicious transactions to the regulator. Although this system is cumbersome, it provides a basic guarantee for the "integrity" of the global financial system.

The technical characteristics of stablecoins fundamentally challenge this intermediary-based regulatory model. This is precisely the fundamental reason why global regulators remain highly vigilant about them and continue to call for them to be included in a comprehensive regulatory framework. A monetary system that cannot effectively prevent financial crimes, no matter how advanced its technology is, cannot gain the ultimate trust of society and the government.

Aiying’s additional opinion : It may be too pessimistic to attribute the “integrity” problem entirely to the technology itself. With the increasing maturity of on-chain data analysis tools (such as Chainalysis, Elliptic) and the gradual implementation of global regulatory frameworks (such as the EU’s MiCA), the ability to track stablecoin transactions and implement compliance reviews is rapidly improving. In the future, “regulatory-friendly” stablecoins that are fully compliant, have transparent reserves, and are regularly audited are likely to become the mainstream of the market. By then, the “integrity” problem will be largely alleviated through the combination of technology and regulation, and should not be seen as an insurmountable obstacle.

2. Supplement and reflection: What else should we see outside the BIS framework?

The "triple door" theory of BIS provides us with a grand and profound analytical framework. However, this section is not intended to criticize or refute the real value of stablecoins, but the style of the Aiying research team has always been to think coldly as an industry outlet, to imagine various possibilities in the future on the premise of avoiding risks, and to provide our clients and industry practitioners with a larger, constructive and complementary perspective, to refine and extend the BIS's discussion, and to explore some real-life issues that have not been deeply developed in the report but are equally important.

1. Technical vulnerabilities of stablecoins

In addition to the three major challenges at the economic level, stablecoins are not impeccable at the technical level. Its operation is highly dependent on two key infrastructures: the Internet and the underlying blockchain network. This means that once a large-scale network outage, submarine optical cable failure, large-scale power outage or targeted cyber attack occurs, the entire stablecoin system may stagnate or even collapse. This absolute dependence on external infrastructure is a significant weakness compared to the traditional financial system. For example, in this 200 million war, Iran’s nationwide Internet outage and even power outages in some areas may not have been taken into account.

Long-term threats come from the disruption of cutting-edge technology. For example, the maturity of quantum computing may pose a fatal blow to most existing public key encryption algorithms. Once the encryption system that protects the private key security of blockchain accounts is cracked, the security cornerstone of the entire digital asset world will no longer exist. Although this seems to be a long way off at present, for a monetary system designed to carry the flow of global value, this is a fundamental security risk that must be faced.

2. The real impact and “ceiling” of stablecoins on the financial system

The rise of stablecoins not only creates a new asset class, but also directly competes with traditional banks for the most core resource - deposits. If this trend of "financial disintermediation" continues to expand, it will weaken the core position of commercial banks in the financial system and affect their ability to serve the real economy.

What is more worthy of further discussion is a widely circulated narrative - "stablecoin issuers support their value by purchasing US Treasury bonds." This process is not as simple and direct as it sounds. There is a key bottleneck behind it: the reserves of the banking system . Let's understand this capital flow process through the following figure:

The process analysis is as follows:

1. Users deposit US dollars in a bank, which then transfers the funds to the stablecoin issuer (such as Tether or Circle).
2. The stablecoin issuer receives this U.S. dollar deposit from its partner commercial bank.
3. When the issuer decides to use the funds to buy U.S. Treasury bonds, it needs to instruct its bank to make the payment. This payment process, especially in large-scale operations, will eventually go through the Federal Reserve's settlement system (Fedwire), resulting in a reduction in the issuer's bank's reserve account balance at the Federal Reserve.
4. Correspondingly, the reserve account balance of the bank that sells the Treasury bonds (such as the primary dealer) will increase.

The key point here is that commercial banks' reserves at the Federal Reserve are not unlimited. Banks need to hold sufficient reserves to meet daily settlements, respond to customer withdrawals and meet regulatory requirements (such as the supplementary leverage ratio SLR). If the scale of stablecoins continues to expand, and large-scale purchases of U.S. Treasuries lead to excessive consumption of the banking system's reserves, banks will face liquidity pressure and regulatory pressure. At that time, banks may limit or refuse to provide services to stablecoin issuers. Therefore, the demand for U.S. Treasuries by stablecoins is subject to the adequacy of the banking system's reserves and the constraints of regulatory policies, and it cannot grow indefinitely.

In contrast, the traditional money fund MMF deposits funds back to commercial bank B through the repo market, increasing the bank's deposit liabilities (MMF deposits) and reserves. This part of the deposit can be used for the bank's credit creation (such as lending), directly restoring the deposit base of the banking system. Let's understand this fund flow process through the following figure:

3. Between “encirclement and suppression” and “recruitment” — the future of stablecoins

Combining the prudent warnings of the BIS and the actual needs of the market, the future of stablecoins seems to be heading towards a crossroads. It faces pressure from global regulators to “encircle and suppress” it, but also sees the possibility of being “recruited” into the mainstream financial system.

Summarize the core contradiction

The future of stablecoins is essentially a game between their "wild innovative vitality" and the core requirements of the modern financial system for "stability, security, and controllability." The former brings about the possibility of efficiency improvement and inclusive finance, while the latter is the cornerstone of maintaining global financial stability. How to find a balance between the two is a common challenge faced by all regulators and market participants.

BIS’s solution: unified ledger and tokenization

Faced with this challenge, the BIS did not choose to deny it completely, but instead proposed a grand alternative: a "unified ledger" based on the "tokenization" of central bank currency, commercial bank deposits and government bonds.

“Tokenised platforms with central bank reserves, commercial bank money and government bonds at the center can lay the groundwork for the next-generation monetary and financial system.” — BIS Annual Economic Report 2025, Key Takeaways

The Aiying research team believes that this is essentially a "recruitment" strategy . It aims to absorb the advantages of programmability and atomic settlement brought by tokenization technology, but firmly place it on the trust foundation dominated by the central bank. In this system, innovation is guided into a regulated framework, which can enjoy the benefits of technology while ensuring financial stability. Stablecoins can only play a "strictly restricted and auxiliary role" at best.

Market selection and evolution

Although the BIS has drawn a clear blueprint, the evolution path of the market is often more complex and diverse. The future of stablecoins is likely to show a differentiated trend:

• Compliance path: Some stablecoin issuers will actively embrace regulation, achieve full transparency of reserve assets, regularly accept third-party audits, and integrate advanced AML/KYC tools. Such "compliant stablecoins" are expected to be integrated into the existing financial system and become regulated digital payment tools or settlement media for tokenized assets.
• Offshore/niche market path: Another part of stablecoins may choose to operate in regions with relatively loose regulation and continue to serve the needs of specific niche markets such as decentralized finance (DeFi) and high-risk cross-border transactions. However, their scale and influence will be strictly limited and it will be difficult for them to become mainstream.

The "triple door" dilemma of stablecoins not only deeply reveals its own structural defects, but also, like a mirror, reflects the shortcomings of the existing global financial system in terms of efficiency, cost and inclusiveness. The BIS report sounded the alarm for us, reminding us not to pursue blind technological innovation at the expense of financial stability. But at the same time, the real needs of the market also remind us that on the road to the next generation of financial system, the answer may not be black and white. Real progress may lie in the prudent integration of "top-down" top-level design and "bottom-up" market innovation, and finding a middle path between "encirclement and suppression" and "recruitment" to a more efficient, safer and more inclusive financial future.

Report link: https://www.bis.org/publ/arpdf/ar2025e.pdf

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