Despite their utility, stablecoins widely used by institutions today pose significant risks for national financial systems, especially in emerging economies that already find it challenging to control money flows and diminish dollarisation impacts.
Speaking in Japan on April 20, the head of the Bank for International Settlements (BIS), Pablo Hernandez de Cos, warned that financial institutions and central banks should not forget that stablecoins are not a neutral stable money-type asset, as many think they are. In de Cos opinion, supported by other major banking experts, stablecoins act more like risk-bearing financial instruments, threatening to bring financial instability and facilitate illicit finance. BIS General Manager urged to adopt unified stablecoin rules across jurisdictions to mitigate some of the inherent risks.
Stablecoins are more akin to securities than fiat money
At a seminar hosted by the Bank of Japan in Tokyo, Pablo Hernandez de Cos reminded the banking community that major stablecoins (e.g. USDT, USDC) do not function like fiat. Instead, they exemplify patterns that resemble exchange-traded funds (ETFs) or securities. They have redemption frictions and frequent price deviations from the $1 peg. If, for any reason, users rush to redeem the asset, crypto issuers are forced to sell their reserves (like government bonds or bank deposits). When happening en masse, that can spread stress into broader financial markets.
The risk is aggravated since the majority of the stablecoin market (85%) consists only of two assets: Tether’s USDT and Circle’s USDC. Just recently, crypto holders were bewildered by the unusual USDT behaviour: the supply of USDT, the biggest stablecoin by supply, was contracting instead of growing. It was one of the sharpest declines in stablecoin circulation since the 2022 collapse of the FTX exchange. Although it wasn’t any market crash event, this example still serves as a bright illustration of what de Cos was speaking about.
Stablecoins can strip central banks off fiscal controls
Another issue with stablecoins is that they could potentially shift power away from central banks toward private issuers. Decentralisation is one of the main premises of any crypto, including stablecoins. Yet, somehow, instead of being owned by many, the crypto sector is still dominated by few issuers, making it centralized, though with power in other hands. BIS head warned that large-scale stablecoin adoption could undermine national monetary and fiscal policies, increase volatility in capital flows, and drain bank deposits while withdrawal exodus, weakening credit creation.
In emerging markets, the risks are more pronounced. Here, stablecoins may drive “digital dollarization” and reduced control over local currencies – something many developing economies already struggle with. Thus, just last week, the central bank of the Democratic Republic of Congo was forced to ban all cash transactions in foreign currencies starting April 2027 to curb the dominance of the US dollar and control money flows somehow.
Crypto still dominates in illicit money flows
Additionally, crypto assets like stablecoins remain facilitators of illicit finance in many instances. A significant share of stablecoin activity occurs on public blockchains, via unhosted wallets outside regulation. This creates gaps in AML/CFT enforcement and risks of illicit use. The gaps are even wider, since there is simply no unified regulations across countries regarding stablecoins. Therefore, firms or individuals that wish to engage in criminal activities may exploit regulatory arbitrage and move to looser jurisdictions. On this front, additional compliance checks at the banks’ side would be helpful, believes de Cos.
“While major stablecoin issuers do regularly freeze and burn funds held by known illicit entities, those entities continue to develop new ways to move funds in ways that are difficult to detect. This means that, in a world where traditional financial intermediaries and stablecoins co-exist, bespoke measures are needed to fend off financial integrity risks. One way this could be done is by enforcing comprehensive compliance checks at the crypto ecosystem’s points of contact with the banking system – the so-called on- and off-ramps. Artificial intelligence-assisted monitoring of the history of blockchain transactions can support assessments of whether stablecoins have possibly been used in illicit transactions. This is particularly important as some estimates suggest that stablecoins now account for most illicit transactions within the crypto ecosystem.”
Pablo Hernandez de Cos, General Manager of the BIS
Taking all those risks into consideration, international coordination of legislative efforts would be the best strategy, believes de Cos. For stablecoins, unified crypto rules are key as they are mostly used for cross-border transactions, so fragmented regulation breaks the system. Yet, as many analysts note, initiatives to introduce comprehensive crypto laws have slowed down lately.
