Stablecoins Under Scrutiny as BIS Highlights ETF-Like Structure and FX Risk

The Bank for International Settlements (BIS) has taken a critical view of stablecoins in its latest annual report, alongside broader analysis of artificial intelligence trends, questioning how fiat-pegged tokens function in modern finance.

While stablecoins are widely marketed by the crypto industry as digital money for payments and settlement, the BIS argues they behave more like exchange-traded funds (ETFs) or similar investment products than true money.

The report defines money as something accepted universally “with no questions asked,” whether in cash or bank deposits. Stablecoins, it says, do not consistently meet this standard.

According to the BIS, tokenized fiat assets often trade slightly above or below their peg, similar to ETFs that fluctuate around net asset value. Redemption is also not always frictionless, meaning users may face delays or costs when converting stablecoins back into fiat currency.

“Redemption frictions are common, indicating that current stablecoin designs resemble exchange-traded fund (ETF) shares rather than means of payment,” the report said.

The BIS also pointed to structural differences with traditional banking. Unlike bank deposits, which ultimately settle on central bank balance sheets, stablecoins lack direct access to central bank money and cannot guarantee parity across issuers or blockchains under all conditions.

Instead, their stability depends on confidence in issuers’ reserves and redemption mechanisms rather than an explicit sovereign guarantee.

The report also criticized the “cash-in-advance” model used by stablecoin issuers, where tokens are created only after users deposit funds. While this ensures full backing, it limits the ability to expand money supply through credit creation, as commercial banks do.

FX risks and dollarization

The BIS further warned that stablecoins may be reinforcing dollar dominance rather than replacing fiat systems. It pointed to increasing flows from non-dollar currencies into USD-pegged tokens, which can weaken local currencies and intensify pressure in foreign exchange markets.

This pattern resembles traditional deposit dollarization, where households shift savings into foreign currency during periods of inflation or macroeconomic stress. The BIS noted that once such behavior takes hold, it can persist for extended periods.

Stablecoins may accelerate this dynamic due to their speed and global reach. The report also highlighted frictions in arbitrage between crypto and traditional FX markets, which could raise costs in FX swap markets.

While some jurisdictions have introduced restrictions on stablecoin usage, the BIS cautioned that enforcement is likely to remain imperfect due to the ease of peer-to-peer transfers and self-custodied wallets.

As a result, traditional capital controls that work in the banking system may be far less effective in a borderless, token-based financial environment.