BIS warns stablecoins could fragment global monetary system

The Bank for International Settlements in Basel warned that the rapid expansion of stablecoins risks fragmenting the global monetary system and reducing the effectiveness of national monetary policy. The warning appears in the BIS Annual Economic Report published Sunday.

The report assessed the roughly $316 billion stablecoin market and said tokens pegged to fiat ‘lack the institutional features required to serve as safe, reliable money at scale.’ It flagged structural weaknesses in how stablecoin reserves are managed and said a large shift of deposits from banks into private digital tokens could reduce bank funding and limit credit to households and businesses.

Economists at the BIS identified a trend they called ‘stablecoin dollarization,’ in which dollar-denominated stablecoins are increasingly used in countries with weaker domestic currencies. The report said that pattern could weaken monetary sovereignty, reduce the effectiveness of domestic policy tools, lower bank intermediation and raise exposure to volatile cross-border capital flows, with emerging market economies most exposed.

The report also criticized public permissionless blockchains, including networks such as Bitcoin and Ethereum, as a foundation for systemically important financial services. It argued these networks face limits on scalability, legal accountability and settlement finality. The analysis focused on the economics of decentralized consensus, noting that validators are paid through transaction fees that rise with network activity, and that higher demand tends to produce longer confirmation times and higher costs rather than brief slowdowns.

BIS also pointed to governance and accountability gaps on permissionless chains. Without a clearly identifiable entity responsible for maintaining the system, resolving disputes or ensuring compliance with financial integrity rules, the report said such networks face obstacles to supporting large-scale regulated financial activity.

Rather than rejecting tokenization, the BIS urged faster development of tokenized central bank money and tokenized commercial bank deposits on regulated, interoperable platforms. The report described a ‘unified ledger’ architecture that would combine tokenized central bank money, tokenized bank deposits and tokenized financial assets on programmable platforms operating within existing legal and institutional frameworks. The BIS cited Project Agorá as evidence that tokenized payments can settle in seconds on regulated infrastructures.

The report cautioned that current regulatory approaches to stablecoins may be inadequate if private digital currencies continue to expand. It warned of rising fragmentation across layer 1 and layer 2 networks and said private stablecoins are unlikely to form a durable monetary foundation unless they operate within stronger institutional and legal structures.

The Annual Economic Report provides the BIS’s assessment of global monetary and financial trends and recommends that public authorities and the financial industry prioritize work on regulated, tokenized forms of official money to preserve monetary stability and financial integrity.