BIS report flags stablecoins’ flaws, dollarization risk

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The Bank for International Settlements (BIS) published its annual report in which it suggested that stablecoins face “a number of shortcomings” when it comes to being treated as, or widely adopted as, money, not least the fundamental principle of “trust.”

• Traditional monetary systems set bar high for digital money
• The risks in stablecoin growth
• When stablecoins go mainstream

The paper also warned that stablecoins could lead to negative consequences such as dollarization, potentially undermining monetary sovereignty in emerging economies, while conceding that there is a gap in traditional monetary systems that blockchain could potentially fill—if implemented and governed correctly.

Stablecoins fall short of money

According to the BIS, an international institution founded in 1930 to foster monetary and financial cooperation while serving as a bank for central banks, the foundation of money is trust.

“Trust is the foundation of money. What matters most is that money is accepted for payment with no questions asked,” read the paper.

In its 133-page annual report, the BIS argued that the traditional monetary system, combining central bank money—“the ultimate safe settlement asset”—with private sector intermediation, ensures that all forms of money are redeemable at par, liquidity is supplied elastically, and integrity is upheld in everyday use.

These properties “remain the benchmark for judging new technologies and instruments that aspire to be money,” said the BIS.

Based on this benchmark, the report suggested that stablecoin arrangements fall short in several key areas, namely: they aim to maintain a stable value relative to an asset (typically the U.S. dollar), but their value fluctuates in practice; the current infrastructure of public permissionless blockchains exhibits fragmentation and cannot be scaled up easily; and the use of so-called unhosted wallets without know-your-customer (KYC) checks raises fundamental financial integrity concerns.

Because of these perceived failings, the BIS said that stablecoins cannot currently claim the trust necessary to be a widely adopted means of payment.

As evidence of this, the report noted that, notwithstanding periods of rapid growth, “the use of stablecoins remains modest.”

Stablecoins stagnate – relatively speaking

The stablecoin market capitalization reached new heights in 2025, topping $300 billion in December and now sitting at around $320 billion, as of June 2026. Yet this remains a fraction of the global money market, dwarfed by trillions of U.S. dollars in bank deposits.

Furthermore, a push by governments around the globe to provide regulatory clarity for stablecoins—including the U.S. GENIUS Act, the European Union’s Markets in Crypto-Assets (MiCA) regulation, and the United Kingdom’s soon-to-be finalized stablecoin regulation—appears to have not given the stablecoins the subsequent boost many hoped for and predicted.

“Experience so far also shows that robust domestic regulatory frameworks have not, by themselves, catalyzed large non-US dollar regulation-compliant stablecoin markets,” noted the BIS. “Issuance of these coins remains a minute fraction compared with U.S. dollar-pegged issuance. Annual stablecoin transaction volume amounted to an estimated $28 trillion in 2025, equivalent to less than three business weeks of settlement volumes of the largest U.S. wholesale payment systems.”

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What happens if stablecoins succeed?

According to the report, if stablecoins were to become widely adopted, a range of macro-financial implications could follow, with credit provision, financial stability, monetary policy transmission, and fiscal space all potentially affected.

Specifically, greater household demand for stablecoins could lead to bank disintermediation, whereby private wallets cut the middleman (banks) out of the money and transaction loop. This, argued the BIS, could make banks’ funding more expensive and less stable, dampen credit supply, and increase risks to financial stability.

“Rising competition for funding from stablecoins would generally imply rising pressure on banks to raise deposit rates, increasing banks’ funding costs,” explained the report. “If stablecoin issuers’ deposits with banks were segregated to protect coin holders, their usability for banks’ internal treasury purposes would be further reduced, intensifying the pressure on banks’ liquidity management.”

The effects of stablecoins could be particularly stark in emerging economies with relatively weak macro-financial fundamentals, where high demand for foreign stablecoins could foster dollarization, potentially undermining monetary sovereignty.

This is already being seen in some jurisdictions, such as Argentina, where recurring financial crises and a lack of trust in the Argentine Peso have driven increasing numbers of citizens to digital assets, especially perceived as ‘stable’ U.S. dollar-backed stablecoins.

Meanwhile, the International Monetary Fund (IMF) recently warned that Nigeria’s enthusiastic embrace of dollar-backed stablecoins represents “a digital form of dollarization. By reducing demand for the local currency, it could weaken the transmission of domestic monetary policy.”

“In addition to affecting macroeconomic conditions in the domestic economy, foreign demand for stablecoins has implications in other economies, particularly EMDE [emerging market and developing economies],” read the report. “If past experience of deposit dollarization is taken as a guide, dollarization through stablecoins could prove quite persistent.”

Dollarization through stablecoins also raises new challenges, with demand for foreign stablecoins (i.e., U.S. dollar-referenced stablecoins held by non-U.S. residents) potentially leading to more volatile and more sizeable capital flows.

Despite these risks, the report wasn’t all bad news for stablecoin advocates; the BIS also noted that currency substitution pressures can, at the margin, “sharpen incentives” for sound macroeconomic policies and upgrade domestic payment options.

“The ready availability of foreign stores of value raises the premium on ensuring price stability, maintaining prudent fiscal positions and setting up efficient domestic payment systems,” suggested the report. “Past de‑dollarization episodes suggest that sustained improvements in policy frameworks and the development of markets and instruments in local currency can gradually reverse foreign currency use.”

In this sense, the challenge posed by foreign stablecoins could, conversely, catalyze reforms that ultimately strengthen monetary sovereignty.

In addition, competitive effects on intermediation could also deliver benefits to users. By compressing excess margins and raising deposit remuneration, stablecoin competition can reduce payment fees and raise households’ and firms’ interest income. In response, banks would likely cut operating costs, invest in digital capabilities and pass through policy rates more swiftly—outcomes that can improve the allocation of credit in the economy over time.

“While adjustments in the financial sector are difficult to anticipate, historical experience suggests that when new competitors emerge, incumbent intermediaries adapt to sustain lending while offering improved and less costly services,” said the BIS.

Specifically, the report suggested that while the current system is robust, it struggles with fragmentation across legacy systems, rising costs, increasing operational risks, and limited competition. The report noted that innovative proposals to reform this aging system include rebuilding the underlying infrastructure using new technologies, such as distributed ledger technology and tokenization.

This suggests that there is a need here that stablecoins could fill, if the technology and regulation are done right, such that the asset class could build the essential trust necessary for a mass-adoption monetary system.

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