BIS says stablecoins are more like ETFs than actual money

Foreign exchange nightmare

Crypto was supposed to be an alternative to fiat, especially the dollar. Stablecoins are doing the opposite, and accelerating dollarization in the process, the BIS said.

The report found rising flows of non-dollar currencies into US dollar-pegged stablecoins, and said these flows can weaken domestic currencies in the spot market. They also expose friction in arbitrage between crypto markets and conventional foreign exchange (FX) markets, and may raise the cost of buying dollars through the FX swap market.

The BIS frames this as a new, faster version of an old problem: deposit dollarization, where households create foreign-currency bank deposits during periods of macroeconomic instability in the home country. The same triggers apply, the report says as high inflation and sovereign stress drive larger inflows into foreign stablecoins. And once that kind of dollarization takes hold, the BIS notes, it tends to persist for years.

What makes the stablecoin version harder to manage is enforcement. A number of countries, particularly emerging market and developing economies, have already imposed restrictions on cross-border stablecoin use. But the BIS says such measures “are, however, likely to be imperfect given the digital bearer-like nature of tokens and the availability of unhosted wallets.”

In other words, capital controls that work reasonably well on traditional bank deposits don’t translate cleanly to a self-custodied, borderless token.