The Bank for International Settlements (BIS) has taken a critical look at stablecoins and AI trends in its latest annual report, questioning how fiat-pegged tokens function within the broader financial system.

While stablecoins are widely promoted by the crypto industry as a form of digital money for payments and settlement, the BIS argues they more closely resemble exchange-traded funds (ETFs) or other investment products than true money.

The report defines money as something accepted universally “with no questions asked,” whether in cash or bank deposits. Stablecoins, it says, do not consistently meet this standard.

According to the BIS, tokenized fiat assets frequently trade slightly above or below their peg, similar to ETFs that fluctuate around net asset value. Redemption is also not always seamless, meaning users may face delays or costs when converting tokens back into fiat.

“Redemption frictions are common, indicating that current stablecoin designs resemble exchange-traded fund (ETF) shares rather than means of payment,” the report said.

The BIS also highlighted structural gaps with traditional banking. Unlike bank deposits, which ultimately settle on central bank balance sheets, stablecoins lack direct access to central bank money and cannot guarantee parity across issuers or blockchains in all conditions.

Instead, their value depends on confidence in issuers’ reserves and redemption mechanisms rather than a sovereign guarantee embedded in the banking system.

The report also criticized the “cash-in-advance” model, in which stablecoins are issued only after users deposit funds. While this ensures full backing, it prevents the flexible credit creation that allows commercial banks to expand money supply.

FX risks and dollarization

The BIS further warned that stablecoins may be reinforcing dollar dominance rather than challenging it. It pointed to rising flows from non-dollar currencies into USD-pegged tokens, which can weaken local currencies and add pressure to foreign exchange markets.

This dynamic mirrors traditional deposit dollarization, where households shift savings into foreign currency during periods of inflation or macroeconomic stress. The BIS noted that such behavior can persist once established.

Stablecoins may accelerate the trend due to their speed and global accessibility. The report also highlighted frictions in arbitrage between crypto and traditional FX markets, potentially increasing costs in FX swap markets.

While some countries have imposed restrictions on stablecoin usage, the BIS cautioned that enforcement is likely to remain limited due to the ease of peer-to-peer transfers and self-custodied wallets.

As a result, traditional capital controls that function in the banking system may be far less effective in a borderless, token-based financial environment.