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

Written by: AiYing Research

In the wave of digital assets, stablecoins are undoubtedly one of the most remarkable 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 cryptocurrencies and are increasingly becoming an important infrastructure in decentralized finance (DeFi) and global payments. Their market value 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 (Illustration). Its explosive growth sharply contrasts with the cautious attitude of regulators.

However, just as the market was 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 rethink the nature of stablecoins.

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

The First Gate: The Dilemma of Uniqueness - Can Stablecoins Remain "Stable" Forever?

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 exactly equal to the face value of another unit. Simply put, "one dollar is always one dollar." This constant uniformity 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, making it fundamentally impossible to 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 reality, their value varied depending on the issuing bank's creditworthiness and solvency. A 1-dollar bill from a remote 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. Today's stablecoins, in the view of the BIS, are a digital replica of this historical disorder—each stablecoin issuer behaves like an independent "private bank," and whether the "digital dollars" they issue can truly be redeemed remains an open question.

We do not need to look back too far in history; recent painful lessons are enough to illustrate the problem. The collapse of the algorithmic stablecoin UST (TerraUSD) saw its value drop to zero in just a few days, wiping out hundreds of billions of dollars in market value. This incident vividly demonstrates how fragile the so-called "stability" is when the chain of trust breaks. Even asset-backed stablecoins have faced persistent doubts regarding the composition, auditing, and liquidity of their reserve assets. Therefore, stablecoins are already struggling before the first hurdle of "uniqueness."

The Second Layer: 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 contract 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 manage risks.

BIS points out that stablecoins, particularly those that claim to hold 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 solely to hold safe reserve assets, without engaging in lending. While this sounds very safe, it comes at the complete expense of 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 creates more money through the credit creation of the banking system, supporting the operation of the real economy.

Stablecoin System (Lack of Flexibility):

Suppose you use 1000 USD to purchase 1000 units of a certain stablecoin. The issuer promises to deposit all 1000 USD in a bank or buy U.S. Treasuries as reserves. This money is "locked in" 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," 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 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 are most in need of financial support. A recent article by Aiying titled "Profit Questioning Under the 'Stable' Halo: Insights from the All-Losses of Hong Kong Virtual Banks, Deriving the Dilemmas of Stablecoin Business Models" can be referenced.

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 Layer of the 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 must be secure, efficient, and able to effectively prevent illegal activities such as money laundering, terrorist 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 severe challenge to the financial "integrity." The core issue lies in the anonymity and decentralization characteristics, which make it difficult for traditional financial regulatory measures to be effective.

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 just a few minutes with low fees. Although the record of this transaction is publicly accessible on the blockchain, it is extremely difficult to correlate these addresses, consisting of random characters, with individuals or entities in the real world. 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) virtually ineffective.

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 under a strict regulatory network. The remitting bank, the receiving bank, and the intermediary banks must comply with the laws and regulations of their respective countries, verify the identities of the parties involved in the transaction, and report suspicious transactions to the regulatory authorities. Although this system is cumbersome, it provides a fundamental 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 regulatory bodies remain highly vigilant and continuously call for their inclusion in a comprehensive regulatory framework. A currency system that cannot effectively prevent financial crime, no matter how advanced its technology, cannot gain the ultimate trust of society and government.

Aiying's viewpoint supplement: Blaming the "integrity" issue solely on the technology itself may be overly pessimistic. With the increasing maturity of on-chain data analysis tools (such as Chainalysis and Elliptic) and the gradual implementation of global regulatory frameworks (such as the EU's 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 BIS "triple gate" theory provides us with a grand and profound analytical framework. However, this section is not intended to criticize 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 in the industry's wind direction, imagining various possibilities for the future based on the premise of risk avoidance. We hope to provide our clients and industry practitioners with a broader, constructive, and supplementary perspective to refine and extend BIS's discourse, exploring some crucial real-world issues that the report has not delved into deeply.

1. The technical 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 once a large-scale network outage, undersea 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 traditional financial systems. For example, in this case of the two hundred million war, with Iran experiencing a nationwide internet blackout and even power outages in some regions, such extreme situations may not have been taken into account.

A more long-term threat comes from the disruption of cutting-edge technology. For example, the maturity of quantum computing could pose a fatal blow to most existing public key cryptographic algorithms. Once the encryption system that protects the security of blockchain account private keys is compromised, the foundational security of the entire digital asset world will be lost. Although this seems distant at present, it is a fundamental security risk that must be addressed for a monetary system aimed at carrying global value flow.

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.

What is worth exploring in depth is a widely circulated narrative - "The issuer of stablecoins supports its value by purchasing U.S. Treasury bonds." This process is not as simple and direct as it sounds, and 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: Schematic Diagram of Fund Flow and Constraints for Stablecoin Purchases of U.S. Treasuries

The process analysis is as follows:

Users deposit dollars into the bank and then transfer them to the stablecoin issuer (such as Tether or Circle) through bank transfer.

The issuer of the stablecoin receives this dollar deposit from the commercial banks it collaborates with.

When the issuer decides to use the 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.

Correspondingly, the bank selling 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 sufficient 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, putting banks under liquidity and regulatory pressure. At that time, banks may limit or refuse to provide services to stablecoin issuers. Therefore, the demand for U.S. Treasury bonds by 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 (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 us understand this flow of funds process through the diagram below:

Chart 3: Schematic Diagram of the Capital Flow and Constraints of MMFs Purchasing U.S. Treasuries

Between "Encirclement" and "Amnesty" - The Future Path of Stablecoins

Considering the prudent warnings from BIS along with the real demands of the market, 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 with a "reconciliation."

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 the possibility of efficiency enhancement and inclusive finance, while the latter is the cornerstone of maintaining global financial stability. Finding a balance between the two is a common challenge faced by all regulators and market participants.

BIS's solution: Unified Ledger and Tokenization

In the face of this challenge, the BIS has not chosen to completely deny it, but instead has 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

The Aiying research team believes this is essentially a "pacification" strategy. It aims to absorb the advantages of tokenization technologies such as programmability and atomic settlement, while firmly placing them under a trust base dominated by central banks. In this system, innovation is directed to operate 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 has outlined a clear blueprint, the evolution of the market is often more complex and diverse. The future of stablecoins is likely to present a differentiated landscape:

Compliance Path:

A portion of stablecoin issuers will actively embrace regulation, achieve complete transparency of reserve assets, undergo regular third-party audits, and integrate 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 serve the demands 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 flaws but also reflects 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 demands of the market also indicate 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 "encirclement" and "reconciliation" to achieve a more efficient, safer, and more inclusive financial future.