Cold Reflection on the Wave of Stablecoins - Why Did BIS Sound the Alarm?

In the wave of digital assets, stablecoins are undoubtedly one of the most striking innovations in recent years. With their promise of being pegged to fiat currencies like the US dollar, they have built a value "safe haven" in the volatile world of cryptocurrencies, and are increasingly becoming important infrastructure in decentralized finance (DeFi) and global payments. 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 Capitalization Growth Trend (Schematic Diagram). Its explosive growth stands in stark contrast to the cautious attitude of regulatory agencies.

However, just as the market is in a frenzy, 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 pointed out 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 bucket of cold water, forcing us to reevaluate the nature of stablecoins.

The Aiying research team aims to deeply interpret the BIS report, focusing on its proposed "Triple Gate" theory of currency—that any reliable monetary system must pass through three tests: Singleness, Elasticity, and Integrity. We will analyze the dilemmas faced by stablecoins in front of these three gates with specific examples and supplement the realistic considerations beyond the BIS framework, ultimately exploring the future direction of monetary digitization.

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

The "uniqueness" 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. In simple terms, "one dollar is always one dollar." This constant and unified value is the fundamental premise for currency to fulfill its three major functions: unit of account, medium of exchange, and store of value.

The core argument of the 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 cited the historical "Free Banking Era" (approximately 1837-1863 in the United States) as a mirror in its report. At that time, the United States had no central bank, and privately chartered banks in each state could issue their own banknotes. These banknotes were theoretically redeemable for gold or silver, but in practice, their value varied depending on the creditworthiness and solvency of the issuing bank. A 1-dollar bill from a remote area bank might only be worth 90 cents in New York, or even less. This chaotic situation led to extremely high transaction costs, severely hindering economic development. In the view of the BIS, today's stablecoins are precisely a digital replica of this historical chaos—each stablecoin issuer operates 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 issue. The collapse of the algorithmic stablecoin UST (TerraUSD) saw its value drop to zero within just a few days, erasing hundreds of billions of dollars in market value. 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, auditing, and liquidity of their reserve assets have been under constant scrutiny. Therefore, stablecoins are already struggling at the first hurdle of "uniqueness."

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

If "uniqueness" pertains to 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 contract credit based on the actual demands of economic activity. 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 used 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 actually a "Narrow Bank" model. This model completely uses users' funds to hold safe reserve assets without lending. While this sounds 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 for goods from suppliers, who then deposit this money back into the bank. This cycle continues, and the initial 1000 yuan deposit generates more money through the credit creation of the banking system, supporting the operation of the real economy.

• Stablecoin System (Lack of Flexibility):

Assuming you used 1000 USD to purchase 1000 units of a certain stablecoin. The issuer promises to deposit the entire 1000 USD into a bank or purchase U.S. Treasury bonds as reserves. This money is then "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 USD to flow in, and cannot create credit based on the endogenous demand 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 shock to 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 lead to a reduction in the funds available for banks to lend, shrinking their credit creation capacity (similar to the nature of quantitative tightening). This could trigger a credit crunch, raise financing costs, and ultimately harm small and medium-sized enterprises and innovative activities that need financial support the most.

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

The Third Gate: 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 must be secure, efficient, and capable of effectively preventing illegal activities such as money laundering, terrorist financing, and tax evasion. This requires a sound legal framework, clear division of responsibilities, and strong regulatory enforcement capabilities to ensure the legality and compliance of financial activities.

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

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

In contrast, traditional international bank transfers (such as through the SWIFT system) may sometimes appear inefficient and costly, but their advantage lies in the fact that each transaction is within a strict regulatory framework. Remitting banks, receiving banks, 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 foundational security 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 continually call for their inclusion in a comprehensive regulatory framework. A monetary system that cannot effectively prevent financial crime, regardless of how advanced its technology is, cannot gain the ultimate trust of society and government.

Aiying's viewpoint supplement: Completely attributing the "integrity" issue to the technology itself may be overly pessimistic. With the increasing maturity of on-chain data analysis tools (such as Chainalysis and Elliptic), as well as 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 the market mainstream. 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 BIS's "triple door" theory provides us with a grand and profound analytical framework. However, this section does not intend to critique or refute the real value of stablecoins, but rather the Aiying research team's style has always been to position itself as a cold reflection of the industry's trends, envisioning various possibilities for the future with the premise of risk avoidance. We hope to provide our clients and industry professionals with a larger, constructive, and supplementary perspective to refine and extend the BIS's discourse, exploring some practical issues that have not been deeply addressed in the reports but are equally crucial.

1. The technological vulnerabilities of stablecoins

In addition to the three major challenges at the economic level, stablecoins are also not without flaws at the technical level. Their operation heavily relies on two key infrastructures: the internet and the underlying blockchain network. This means that in the event of a large-scale network outage, submarine cable failure, widespread power paralysis, or targeted cyber attacks, 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 instance, in this recent two billion 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 cornerstone of security for the entire digital asset world will cease to exist. Although this seems distant at present, it is a fundamental security risk that a currency system aimed at facilitating the flow of global value must confront.

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

The rise of stablecoins has not only created a new asset class but has also directly competed with traditional banks for the most critical 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.

What is worth exploring further is a widely circulated narrative - "Stablecoin issuers support their value by purchasing US 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 us understand this flow of funds through the diagram below:

Figure 2: Diagram of the flow and constraints of funds for purchasing US Treasury bonds with stablecoins.

The process analysis is as follows:

1. Users deposit US dollars into a bank and then transfer them to the stablecoin issuer (such as Tether or Circle) via bank transfer.
2. The stablecoin issuer receives this USD deposit in the commercial bank it collaborates with.
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 issuer's bank's reserve account balance at the Federal Reserve.
4. Accordingly, the bank of the party selling the government bonds (such as a primary dealer) 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 the supplementary 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, and banks will face liquidity pressures and regulatory pressures. At that time, banks may limit or refuse to provide services to stablecoin issuers. Therefore, the demand for U.S. Treasury bonds from stablecoins is limited by the adequacy of reserves in the banking system and regulatory constraints, and cannot grow indefinitely.

In contrast, traditional money market funds (MMFs) deposit funds back into commercial bank 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 the flow of funds through the diagram below:

Figure 3: Schematic Diagram of the Fund Flow and Constraints of MMFs Purchasing US Treasury Bonds

Between "Encirclement" and "Surrender" - The Future of Stablecoins

Considering the prudent warnings from BIS and the reality of market demands, the future of stablecoins seems to be at a crossroads. It faces pressure from global regulators for a "crackdown", while also seeing the possibility of being integrated into the mainstream financial system as a "concession."

summarize the core contradictions

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 for maintaining global financial stability. Finding a balance between the 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 completely deny it, but instead proposed a grand alternative: a "Unified Ledger" based on central bank currencies, commercial bank deposits, and government bonds that are "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

Aiying research believes that this is essentially a "pacification" strategy. It aims to absorb the advantages brought by tokenization technology, such as programmability and atomic settlement, while firmly placing it on a trust foundation dominated by central banks. In this system, innovation is guided to occur within a regulated framework, allowing for the enjoyment of technological dividends while ensuring financial stability. Stablecoins can at most play a "strictly limited, auxiliary role."

Market Selection and Evolution

Although the BIS outlines a clear blueprint, 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 full 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.

• Offshoring/Niche Market Path:

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

The "triple gate" dilemma of stablecoins not only profoundly reveals its own structural flaws but also reflects the shortcomings of the existing global financial system in terms of efficiency, cost, and inclusiveness. The BIS report serves as a wake-up call, reminding us that we cannot pursue blind technological innovation at the expense of financial stability. At the same time, the real market demand also suggests that the answer on the road to the next generation of financial systems may not be purely black and white. True progress may lie precisely in cautiously integrating top-down design with bottom-up market innovation, finding a middle path between "encirclement" and "reconciliation" towards a more efficient, secure, and inclusive financial future.