According to a new research report from the Bank for International Settlements (BIS), fiat-backed stablecoins are deemed “not a safe store of value.”
The report indicates that from January 2019 to September 2023, fiat-backed stablecoins were able to maintain their peg ratio only 94% of the time, falling short of the 100% assurance often promised in project white papers. In comparison, crypto-backed stablecoins and commodity-backed stablecoins performed even worse, with peg ratios 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 lifespan. Notably, Tether (USDT) and USD Coin (USDC), the two most-used stablecoins in the market, met this standard, while other fiat-backed stablecoins experienced more frequent and larger deviations from their pegs.
Stablecoins typically aim to maintain a 1-to-1 peg to an underlying fiat currency, most commonly the US dollar. However, stablecoins backed by other currencies like the euro or gold have also gained popularity in recent times.
For the purpose of its research, the BIS classified stablecoins into categories such as fiat-backed stablecoins, crypto-backed stablecoins, commodity-backed stablecoins, or unbacked stablecoins.
Concerns about transparency of reserves for stablecoins
In addition to questioning the stability of peg ratios, the BIS raised concerns about the lack of scrutiny in stablecoin issuers’ reserve practices. The report highlighted that some issuers do not involve independent certified public accountants for auditing their reserves. Even when audits are conducted, the BIS noted a lack of a common reporting standard in reserve reports.
The report emphasizes potential uncertainties regarding the ability of stablecoins to convert users’ assets at par on demand, highlighting potential financial stability implications in the event of a run. The BIS stated, “As a result, it is impossible to assess with any degree of confidence the quality of the underlying reserve assets of many stablecoins,” adding that this makes it “unclear whether these stablecoins would be able to convert users’ stablecoins at par on demand.”
