Cold Thoughts on the Wave of Stablecoins: Why Did the BIS Sound the Alarm?

This article will analyze the dilemmas faced by stablecoins in front of these three hurdles with specific examples, and will supplement the realistic considerations outside the BIS framework, ultimately discussing the future direction of currency digitization.

Written by: AiYing Research

In the wave of digital assets, stablecoins are undoubtedly one of the most notable innovations in recent years. With their promise of being pegged to fiat currencies like the US dollar, they have built a "safe haven" of value in the volatile world of cryptocurrency, and are increasingly becoming important infrastructure in decentralized finance (DeFi) and global payment sectors. Their market capitalization has soared from zero to hundreds of billions of dollars, seemingly heralding the rise of a new form of currency.

Chart 1: Global Stablecoin Market Value Growth Trend (Illustrative). Its explosive growth stands in stark contrast to the cautious attitude of regulators.

However, just as the market was celebrating, the Bank for International Settlements (BIS), known as the "central bank of central banks," issued a stern warning in its economic report for May 2025. The BIS clearly stated that stablecoins are not true currencies, and behind their seemingly prosperous ecosystem lies systemic risks that could shake the entire financial system. This conclusion is like a splash of cold water, forcing us to reassess the nature of stablecoins.

The Aiying research team aims to provide an in-depth interpretation of the BIS report, focusing on the proposed "Triple Gate" theory of currency—namely, that any reliable currency system must pass the three tests of Singleness, Elasticity, and Integrity. We will analyze the dilemmas faced by stablecoins in front of these three gates using specific examples and supplement the real considerations outside the BIS framework, ultimately exploring the future direction of currency digitalization.

The First Door: The Dilemma of Uniqueness - Can Stablecoins Always Be "Stable"?

The "singularity" of currency is the cornerstone of the modern financial system. It means that at any time and in any place, the value of one unit of currency should be precisely equal to the face value of another unit. Simply put, "one dollar is always one dollar." This constant unity of value is the fundamental premise for currency to fulfill its three main functions as a unit of account, medium of exchange, and store of value.

The core argument of BIS is that the value anchoring mechanism of stablecoins has inherent flaws, which fundamentally cannot guarantee a 1:1 exchange with fiat currencies (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 exposes it to the risk of "decoupling" at any time.

The BIS referenced the historical "Free Banking Era" (approximately 1837-1863 in the United States) in its report as a mirror for reflection. At that time, there was no central bank in the United States, and privately chartered banks in each state could issue their own banknotes. Theoretically, these banknotes could be redeemed for gold or silver, but in reality, their value varied according to the creditworthiness and solvency of the issuing bank. A $1 note from a remote area bank might only be worth 90 cents, or even less, in New York. This chaotic situation led to extremely high transaction costs, severely hindering economic development. According to the BIS, today's stablecoins are a digital version of this historical chaos—each stablecoin issuer functions like an independent "private bank," and whether the "digital dollars" they issue can truly be redeemed remains an unresolved question.

We do not need to look back too far into history; recent painful lessons are enough to illustrate the problem. The collapse of the algorithmic stablecoin UST (TerraUSD), which went to zero in value in just a few days, wiped out hundreds of billions of dollars in market capitalization. This incident vividly demonstrates how fragile the so-called "stability" is when the chain of trust is broken. Even for asset-backed stablecoins, the composition of their reserve assets, audits, and liquidity have always been questioned. Thus, stablecoins are already struggling at the first hurdle of "singularity."

The Second Gate: The Tragedy of Elasticity - The "Beautiful Trap" of 100% Reserve

If "uniqueness" concerns the "quality" of currency, then "elasticity" pertains to the "quantity" of currency. The "elasticity" of currency refers to the financial system's ability to dynamically create and shrink credit based on the actual demand of economic activities. This is the key engine that allows the modern market economy to self-regulate and sustain growth. When the economy is booming, credit expansion supports investment; when the economy cools down, credit contraction is employed to control risks.

The BIS points out that stablecoins, especially those that claim to have 100% high-quality liquid assets (such as cash and short-term government bonds) as reserves, are essentially a "narrow bank" model. This model uses users' funds entirely to hold safe reserve assets without engaging in lending. While this may sound very safe, it comes at the cost of completely sacrificing monetary "elasticity".

We can understand the differences through a scenario comparison:

• Traditional banking system (with resilience):

Suppose you deposit 1000 yuan into a commercial bank. According to the fractional reserve system, the bank may only need to keep 100 yuan as reserves, while the remaining 900 yuan can be loaned to entrepreneurs in need of funds. This entrepreneur uses the 900 yuan to pay the supplier's invoice, and the supplier then deposits this money back into the bank. This cycle continues, and the initial deposit of 1000 yuan generates more money through the credit creation of the banking system, supporting the operation of the real economy.

• Stablecoin system (lack of flexibility):

Suppose you purchased 1000 units of a certain stablecoin with 1000 dollars. The issuer promises to deposit all of this 1000 dollars into a bank or purchase U.S. Treasury bonds as reserves. This 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, and cannot create credit based on the endogenous needs of the economy. The entire system is like a "stagnant pool of water," lacking 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 flows out of the commercial banking system and is instead held in stablecoins, it will directly reduce the funds available for banks to lend, shrinking their credit creation capacity (similar to the nature of balance sheet reduction). This could trigger a credit crunch, raising financing costs, and ultimately harming small and medium-sized enterprises and innovative activities that need financial support the most. A recent article by Aiying titled "Profit Inquiry Under the 'Stable' Halo: Insights from the Losses of Hong Kong's Virtual Banks, Analyzing the Dilemmas of Stablecoin Business Models" can be referenced.

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

The Third Door: The 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 payment systems be secure, efficient, and capable of effectively preventing illegal activities such as money laundering, terrorism financing, and tax evasion. Behind this, a sound legal framework, clear division of responsibilities, and strong regulatory enforcement capabilities are needed to ensure the legality and compliance of financial activities.

The BIS believes that the underlying technological architecture of stablecoins—especially those built on public chains—poses a serious challenge to the "integrity" of finance. The core issue lies in the anonymity and decentralization features, which make traditional financial regulatory measures difficult to implement.

Let's imagine a specific scenario: a transaction involving millions of dollars in stablecoins is transferred via a public blockchain from one anonymous address to another, and the entire process may take only a few minutes with low fees. Although the record of this transaction is publicly available on the blockchain, correlating these addresses made up of random characters with individuals or entities in the real world is exceptionally difficult. This opens the door for the convenient cross-border movement of illicit funds, rendering core regulatory requirements like "Know Your Customer" (KYC) and "Anti-Money Laundering" (AML) virtually meaningless.

In contrast, traditional international bank transfers (such as through the SWIFT system) may sometimes seem inefficient and costly, but their advantage lies in the fact that each transaction is within a strict regulatory network. The remitting bank, receiving bank, and intermediary banks must comply with the laws and regulations of their respective countries, verify the identities of both parties involved in the transaction, and report suspicious transactions to regulatory authorities. Although this system is cumbersome, it provides a foundational guarantee for the "integrity" of the global financial system.

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

Aiying's viewpoint supplement: Blaming the "integrity" issue entirely on the technology itself may be overly pessimistic. 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 Markets in Crypto-Assets Regulation, MiCA), the ability to track stablecoin transactions and conduct compliance reviews is rapidly improving. In the future, fully compliant, transparently reserved, and regularly audited "regulatory-friendly" stablecoins are likely to become mainstream in the market. At that time, the "integrity" issue will largely be alleviated through the combination of technology and regulation, and should not be seen as an insurmountable obstacle.

Supplement and Reflection: What else should we see beyond the BIS framework?

The "triple gate" 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; rather, the Aiying research team's style has always been to position itself as a cold thinker on the industry's trends, envisioning various possibilities for the future with risk avoidance as a prerequisite. We hope to provide our clients and industry professionals with a larger, constructive, and supplementary perspective to refine and extend BIS's discourse, exploring some critical real issues that have not been deeply discussed in the reports.

1. The technical vulnerabilities of stablecoins

In addition to the three major challenges at the economic level, stablecoins are not without flaws at the technical level. Their 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 cable failure, widespread power outage, or targeted cyber attack occurs, the entire stablecoin system could come to a standstill or even collapse. This absolute dependence on external infrastructure is a significant weakness compared to the traditional financial system. For example, in this recent two hundred million war, Iran experienced a nationwide internet shutdown, and even some areas faced power outages; such extreme situations may not have been considered.

A more long-term threat comes from the disruption of cutting-edge technology. For example, the maturation of quantum computing could pose a fatal blow to most existing public key encryption algorithms. Once the encryption system that protects the security of blockchain account private keys is cracked, the security foundation of the entire digital asset world will cease to exist. Although this currently seems distant, it is a fundamental security risk that must be acknowledged for a monetary system aimed at carrying global value flows.

2. The Real Impact of Stablecoins on the Financial System and the 'Ceiling'

The rise of stablecoins is not only creating a new asset class, but it is also directly competing with traditional banks for the most essential resource—deposits. If this trend of "disintermediation" continues to expand, it will weaken the core position of commercial banks in the financial system, thereby affecting their ability to serve the real economy.

A narrative that deserves deeper exploration is the widely circulated notion that "stablecoin issuers support their value by purchasing U.S. Treasury bonds." This process is not as simple and straightforward as it sounds, as there is a key bottleneck behind it: the reserves of the banking system. Let’s understand this flow of funds through the diagram below:

Figure 2: A diagram of the flow and constraints of funds for stablecoin purchases of U.S. Treasury bonds

The process analysis is as follows:

1. Users deposit US dollars into a bank and then transfer it to the stablecoin issuer (such as Tether or Circle) via a bank transfer.
2. The stablecoin issuer receives this USD deposit in its partner commercial bank.
3. When the issuer decides to use these funds to purchase U.S. Treasury bonds, it needs to instruct its bank to make the payment. This payment process, especially during large-scale operations, will ultimately go through the Federal Reserve's settlement system (Fedwire), resulting in a decrease in the balance of the issuer's bank in the Federal Reserve's reserve account.
4. Accordingly, the bank of the party selling government bonds (such as primary dealers) will see an increase in its reserve account balance.

The key here is that commercial banks do not have unlimited reserves at the Federal Reserve. Banks need to hold enough reserves to meet daily settlements, respond to customer withdrawals, and comply with regulatory requirements (such as supplementing the leverage ratio SLR). If the scale of stablecoins continues to expand, large purchases of U.S. Treasury bonds will lead to excessive consumption of reserves in the banking system, putting banks under liquidity pressure and regulatory pressure. At that time, banks may restrict or refuse to provide services to stablecoin issuers. Therefore, the demand for U.S. Treasury bonds from stablecoins is constrained by the adequacy of reserves in the banking system and regulatory policies, and it cannot grow indefinitely.

In contrast, traditional money market funds (MMF) deposit funds back into commercial banks B through the repurchase market, increasing the bank's deposit liabilities (MMF deposits) and reserves. This portion of deposits can be used for the bank's credit creation (such as issuing loans), directly restoring the deposit base of the banking system. Let's understand this flow of funds through the diagram below:

Chart 3: Schematic Diagram of Fund Flow and Constraints for MMFs Purchasing US Treasury Bonds

Between "Encirclement" and "Surrender" — The Future Path of Stablecoins

Considering the prudent warnings from BIS and the real demands of the market, the future of stablecoins seems to be at a crossroads. It faces pressure from global regulatory bodies for "encirclement," while also seeing the possibility of being integrated into the mainstream financial system as a form of "reconciliation."

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, safety, and controllability." The former brings possibilities for efficiency improvement and inclusive finance, while the latter is the cornerstone of maintaining global financial stability. Finding a balance between these two is a common challenge faced by all regulators and market participants.

BIS Solution: Unified Ledger and Tokenization

In the face of this challenge, the BIS did not choose to outright deny it, but instead proposed a grand alternative: a "Unified Ledger" based on central bank currencies, commercial bank deposits, and government bonds "tokenized".

"Tokenised platforms with central bank reserves, commercial bank money and government bonds at the centre 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 "reconciliation" strategy. It aims to absorb the advantages of tokenization technology such as programmability and atomic settlement, while firmly placing it on a trust foundation led by central banks. In this system, innovation is guided to operate within a regulated framework, allowing for the enjoyment of technological benefits while ensuring financial stability. As for stablecoins, they can at most play a "heavily restricted, auxiliary role."

Market Selection and Evolution

Despite the clear blueprint outlined by the BIS, the evolution 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, achieving complete transparency of reserve assets, regularly undergoing third-party audits, and integrating advanced AML/KYC tools. These "compliant stablecoins" are expected to be integrated into the existing financial system, becoming regulated digital payment tools or settlement mediums for tokenized assets.

• Offshore / Niche Market Path:

Another portion of stablecoins may choose to operate in regions with relatively loose regulations, continuing to serve the demand of specific niche markets such as decentralized finance (DeFi) and high-risk cross-border transactions. However, their scale and influence will be strictly limited, making it difficult for them to become mainstream.

The "triple gate" dilemma of stablecoins not only profoundly reveals its own structural defects but also acts as a mirror, reflecting the shortcomings of the existing global financial system in terms of efficiency, cost, and inclusiveness. The BIS report has sounded the alarm for us, reminding us that we cannot pursue blind technological innovation at the expense of financial stability. However, at the same time, the real market demand also suggests that the answers on the road to the next generation of financial systems may not be black and white. True progress may lie precisely in prudently integrating "top-down" design with "bottom-up" market innovation, finding a middle path between "suppression" and "reconciliation" that leads to a more efficient, safer, and more inclusive financial future.

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