In its most recent research report, dated November 8th, the Bank for International Settlements (BIS), a consortium of central banks worldwide, raised concerns about the stability and reliability of stablecoins, asserting that they are not a secure store of value. The BIS provided several reasons for its skepticism, citing the performance of different types of stablecoins over the past few years.
From January 2019 to September 2023, the BIS revealed that fiat-backed stablecoins, which are meant to maintain a peg to traditional currencies, were able to do so only 94% of the time. This is notably below the 100% peg stability often promised in the whitepapers of stablecoin projects. Meanwhile, crypto-backed stablecoins and commodity-backed stablecoins showed even lower peg stability, with rates of 77% and 50%, respectively.
The BIS pointed out that only seven fiat-backed stablecoins managed to keep their deviations from the peg below 1% for more than 97% of their existence. Tether and USD Coin were among the stablecoins that met this stringent standard. In contrast, the majority of other fiat-backed stablecoins faced more frequent and substantial deviations from their pegs, causing concern over their reliability.
Additionally, the BIS issued a warning regarding the auditing and reporting practices of some stablecoin issuers. They noted that certain issuers do not engage independent certified public accountants to verify their reserves, and even when audits are conducted, the reports often lack a common reporting standard. This lack of transparency raises questions about the ability of stablecoins to redeem users’ holdings at the intended peg and the potential financial stability implications in the event of a run on the stablecoin.
To illustrate the challenges faced by stablecoins, the BIS cited incidents such as Circle’s USDC briefly depegging over 10% from its 1:1 exchange rate with the U.S. dollar in March. This occurred when the stablecoin’s reserve deposits were temporarily inaccessible due to issues with the Silicon Valley Bank. However, USDC subsequently regained its par value.
In another example, the Terra Luna ecosystem, with a market capitalization of $40 billion, faced a crisis when its backing mechanism for the stablecoin Terra USD failed in May. This incident caused a temporary depegging of stablecoin Tether as well, though both stablecoins later returned to their intended pegs.
These cases highlight the vulnerabilities and uncertainties that exist within the stablecoin market, and the BIS report serves as a reminder of the need for greater stability, transparency, and oversight in the sector.
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