The Triple Dilemma of Stablecoins: Insights from the BIS Report on the Future of Digital Money

In the field of cryptocurrency, stablecoins are undoubtedly one of the most notable innovations in recent years. By pegging themselves to fiat currencies like the US dollar, they provide a "safe haven" of value in the volatile crypto world and have gradually become an important infrastructure for decentralized finance 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.

However, just as the market was celebrating, the Bank for International Settlements issued a stern warning in its latest economic report. The report clearly states that stablecoins are not true currency, and behind their seemingly prosperous ecosystem lies systemic risks that could shake the entire financial system. This conclusion serves as a cold shower, forcing us to reassess the nature of stablecoins.

This article will provide an in-depth interpretation of this report, focusing on its proposed "Triple Gate" theory of currency - that any reliable currency system must pass through the three tests of singularity, elasticity, and integrity. We will analyze the dilemmas faced by stablecoins in front of these three gates, using specific examples, and explore the future development direction of digital money.

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

The "uniformity" 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 short, "one dollar is always one dollar." This constant uniformity of value is the fundamental prerequisite for currency to fulfill its three main functions as a unit of account, medium of exchange, and store of value.

The core argument of the report is that stablecoins' value anchoring mechanism has inherent flaws, which fundamentally cannot guarantee a 1:1 exchange with fiat currency. Their trust does not come from national credit but relies on the commercial credit of private issuers, the quality and transparency of reserve assets, which puts them at risk of "decoupling" at any time.

The report cites the historical "Free Banking Era" as a mirror. 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 in gold or silver, but in practice, their value varied depending on the issuing bank's creditworthiness and ability to pay. A $1 bill from a remote area bank might be worth only 90 cents in New York, or even less. This chaotic situation led to extremely high transaction costs, severely hindering economic development. Today's stablecoins, in the report's view, are a digital version of this historical chaos - each stablecoin issuer acts like an independent "private bank", and whether the "digital dollar" it issues can truly be redeemed remains an unresolved question.

Recent painful lessons are enough to illustrate the problem. The collapse of the algorithmic stablecoin UST, which lost its value to zero in just a few days, wiped out hundreds of billions of dollars in market capitalization. This event vividly demonstrates how fragile the so-called "stability" is when the chain of trust breaks. Even asset-backed stablecoins have faced ongoing scrutiny regarding the composition, auditing, and liquidity of their reserve assets. Therefore, before the first hurdle of "uniqueness," stablecoins are already struggling.

The Second Layer: The Tragedy of Elasticity - The "Beautiful Trap" of 100% Reserves

If "uniqueness" pertains to the "quality" of currency, then "elasticity" concerns the "quantity" of currency. The "elasticity" of currency refers to the ability of the financial system to dynamically create and shrink credit based on the actual demand of economic activities. This is the key engine that allows modern market economies 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 report points out that stablecoins, especially those that claim to have 100% high-quality liquid assets as reserves, are actually a "narrow banking" model. This model uses users' funds entirely to hold safe reserve assets without engaging in lending. While this sounds very safe, it comes at the complete expense of monetary "elasticity."

Understand the differences through a scene comparison:

The traditional banking system ( has 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 for goods, and the supplier then deposits this money back into the bank. This cycle repeats, 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.

The stablecoin system ( lacks flexibility ): Suppose you use 1000 US dollars to purchase 1000 units of a stablecoin. The issuer promises to deposit this 1000 US dollars entirely into a bank or buy US 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 US dollars to flow in, and cannot create credit based on the endogenous demand 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 large amounts of funds flow out of the commercial banking system and instead are held in stablecoins, it will directly lead to a reduction in the funds available for banks to lend, shrinking their credit creation capacity. 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.

Of course, in the future, with the widespread use of stablecoins, there may be stablecoin banks ( lending ), and this credit creation will then 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 must be secure and efficient, and able to effectively prevent illegal activities such as money laundering, terrorist financing, and tax evasion. Behind this requires a sound legal framework, clear delineation of responsibilities, and strong regulatory enforcement capabilities to ensure the legality and compliance of financial activities.

The report suggests that the underlying technological architecture of stablecoins - especially those built on public chains - poses serious challenges 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 stablecoin worth millions of dollars is transferred from one anonymous address to another through a public chain, 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 randomly generated addresses with individuals or entities in the real world is exceptionally difficult. This opens the door for the convenient cross-border movement of illicit funds, making core regulatory requirements such as "Know Your Customer" and "Anti-Money Laundering" virtually ineffective.

In contrast, traditional international bank transfers, although sometimes inefficient and costly, have the advantage of being under a strict regulatory network for each transaction. 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 both parties involved in the transaction, and report suspicious transactions to regulatory authorities. Although this system is cumbersome, it provides fundamental safeguards 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.

Blaming the "integrity" issue entirely on the technology itself may be overly pessimistic. With the increasing maturity of on-chain data analysis tools and the gradual implementation of global regulatory frameworks, the ability to track stablecoin transactions and carry out compliance checks 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 viewed as an insurmountable obstacle.

Supplement and Reflection: What else should we consider outside the framework of the report?

The "Triple Gate" theory in the report 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 to serve as a cool-headed positioning of the industry's trends, envisioning various possibilities for the future with risk avoidance as a prerequisite. It aims to offer industry professionals a larger, constructive, and supplementary perspective to further refine and extend the report's discussion, exploring some real issues that the report did not delve into deeply, yet are equally crucial.

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 either. Their operation heavily relies on two key infrastructures: the internet and the underlying blockchain network. This means that once a large-scale network interruption, submarine cable failure, widespread power outage, or targeted cyberattack occurs, the entire stablecoin system could come to a halt or even collapse. This absolute dependence on external infrastructure is a significant weakness compared to traditional financial systems. For example, in the recent war, some regions experienced nationwide internet outages, and even power outages in certain areas; such extreme situations may not have been considered.

A more long-term threat comes from the disruption of cutting-edge technologies. 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 compromised, the security foundation of the entire Digital Money world will cease to exist. Although this seems distant at present, it is a fundamental security risk that must be faced for a currency 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 core resource - deposits. If this trend of "financial 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 further discussion is a widely circulated narrative - "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.

The process analysis is as follows:

• Users deposit dollars into the bank and then transfer them to the stablecoin issuer through the bank.
• The stablecoin issuer receives this dollar deposit from its partner commercial banks.
• 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, resulting in a decrease in the balance of the issuer's bank in the Federal Reserve's reserve account.
• Accordingly, the bank of the party selling the government bonds 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. If the scale of stablecoin continues to expand, large purchases of U.S. Treasury bonds will excessively consume the reserves of the banking system, putting banks under liquidity and regulatory pressure. At that point, banks may limit or refuse to provide services for stablecoins.