The BIS Says Stablecoins Aren’t Ready for Prime Time. That Argument Deserves Some Pushback.
The head of the Bank for International Settlements has a warning about stablecoins: they aren't a credible means of payment at scale.Pablo Hernández de Cos, general manager of the BIS, made that case at the Jackson Hole Economic Symposium, arguing that stablecoins suffer from problems involving interoperability, maintaining value at par, anti-money-laundering enforcement and potential disruption to the traditional banking system.Those concerns aren't imaginary. But the conclusion drawn from them is far less convincing.The biggest problem with the BIS argument is that it seems to judge stablecoins against an idealized version of the existing financial system rather than against the system people actually use.Stablecoins Don't Have to Be Perfect to Be UsefulHernández de Cos argues that stablecoins threaten what economists call the "singleness of money."His example is straightforward: someone holding USDT who needs to pay someone accepting only USDC may have to exchange one stablecoin for another. Because those assets can trade slightly above or below $1, the exchange isn't necessarily made at perfect parity.Technically, that's a legitimate observation.But as an argument against stablecoins operating at scale, it isn't particularly persuasive.The traditional financial system already contains conversion costs, settlement delays, foreign-exchange spreads, payment-processing fees, incompatible networks and intermediaries. Moving money internationally can involve correspondent banks, multiple currencies and multiple fees.The relevant question therefore isn't whether stablecoins eliminate every financial friction.It's whether they can eliminate enough friction to make them useful.And increasingly, the market appears to think they can.The Proposed Alternative Hasn't Solved the Problem EitherThe BIS prefers another technology: tokenized bank deposits.There is nothing inherently wrong with that idea. Tokenized deposits could combine some of blockchain's advantages with the protections and settlement mechanisms of the banking system.There's just one fairly important problem.The system Hernández de Cos describes doesn't exist at meaningful scale.The BIS itself acknowledges that there are currently no multi-bank, cross-jurisdictional ecosystems issuing tokenized deposits within a genuinely interoperable framework.In other words, stablecoins are being criticized for interoperability problems that the BIS's preferred alternative hasn't solved either.That's a significant weakness in the argument.It is much easier to describe how an ideal future banking network should operate than it is to build one and convince banks, regulators, governments and consumers around the world to use it.There's Also an Institutional QuestionThe BIS's preference becomes easier to understand when you look at what each system does structurally.Tokenized deposits modernize the existing banking architecture.Stablecoins potentially compete with parts of it.Under the tokenized-deposit model, commercial banks remain central to the system and central-bank money continues to provide the settlement foundation.Stablecoins can allow dollar-denominated value to move across public blockchain networks without every transaction passing through the conventional banking infrastructure.That doesn't automatically make stablecoins better.But it does mean we should distinguish between two questions:What monetary technology works best for users?andWhat monetary technology best preserves the existing banking architecture?Those aren't necessarily the same question.Washington Is Making a Very Different BetThe disagreement is particularly interesting because the United States is moving in almost the opposite direction.Treasury Secretary Scott Bessent has described stablecoins as a revolution in digital finance and argued that dollar-backed stablecoins could strengthen the dollar's position as the world's reserve currency.The logic isn't difficult to understand.Dollar stablecoins make it possible for someone almost anywhere in the world to hold and transfer something designed to track the U.S. dollar without needing a traditional U.S. bank account.And because regulated payment stablecoins can be backed substantially by highly liquid dollar assets such as short-term U.S. Treasuries, a substantially larger stablecoin market could also become an important source of Treasury demand.That turns the supposed threat of "digital dollarization" on its head from the American perspective.For another country's central bank, widespread adoption of dollar stablecoins may indeed threaten monetary sovereignty.For the United States, widespread global adoption of digital dollars could reinforce it.The Market Should Get a VoteNone of this means stablecoins are risk-free.They aren't.Reserve quality matters. Redemption matters. Regulation matters. Cybersecurity matters. Money laundering is a legitimate concern. Poorly designed stablecoins can fail, and the crypto industry's history provides more than enough evidence of that.Those problems deserve serious regulation and engineering.But "there are risks that still need to be solved" is very different from "this technology isn't credible at scale."The latter conclusion looks premature.Perhaps tokenized bank deposits ultimately become the dominant form of digital money. Perhaps stablecoins do. More likely, different systems will coexist and compete for different applications.We don't know yet.And that's precisely why declaring the winner from a central-banking conference room seems premature.Stablecoins shouldn't succeed because crypto advocates say they should.Tokenized bank deposits shouldn't succeed because central bankers prefer them.Build both.Regulate the risks.Let them compete.Then let businesses and consumers decide which one actually solves their problems.
