BIS Report Criticizes Stability and Transparency of Stablecoins
Summary:
The Bank of International Settlements (BIS) criticized stablecoins in a recent report, deeming them an unstable store of value. The report revealed that between January 2019 and September 2023, most stablecoins inconsistently maintained their peg ratios. BIS also raised concerns over the lack of independent auditing and non-standardized reporting of reserves among stablecoin issuers. Notable incidents involving stablecoins by Circle's USDC and Terra Luna were also highlighted.
In a recent study shared on Nov. 8, the Bank of International Settlements (BIS) — an alliance of global central banks — openly expressed their skepticism about stablecoins, labeling them as an insecure means of preserving value. The BIS underscored between January 2019 and September 2023, their research uncovered that stablecoins tethered to fiat currencies consistently upheld their peg ratio only 94% of the time. This is in stark contrast to the 100% guarantee many projects iterate in their whitepapers. Furthermore, crypto-backed and commodity-backed stablecoins performed even worse, with peg ratios of 77% and 50% respectively.
The BIS report emphasized that a mere seven fiat-backed stablecoins managed to maintain their deviations from the peg below 1% for nearly all (more than 97%) of their lifespan. Both Tether (USDT) and USD Coin (USDC) passed this criterion. However, the international organization noted that all other comparable stablecoins experienced more frequent and severe discrepancies from their pegs.
An additional concern raised by BIS was over the fact that some stablecoin issuers do not engage independent verified accountants to scrutinize their reserves. For the ones that do, there's a lack of uniform reporting standards for these reserve reports. This absence of transparency makes it undecipherable as to whether these stablecoins would be capable of returning users' stablecoins at parity when demanded, and what possible implications a potential run on reserves might have on financial stability.
In a past event, the stablecoin issued by Circle, USDC, momentarily diverged over 10% from its 1:1 exchange rate with the U.S. dollar following temporary blockage of its reserve deposits at the faltering Silicon Valley Bank. Thankfully, the stablecoin has since regained its parity value.
There was also an incident in May where Terra Luna's $40 billion ecosystem experienced a failure in its backing mechanism, which warranted its stablecoin Terra USD. This occurrence temporarily impacted the pegging of stablecoin Tether, which has since regained parity value. This incident questions how firms accepting cryptocurrency payments impact their adoption.
Published At
11/8/2023 7:00:37 PM
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