A new research report from the Bank for International Settlements (BIS) raises concerns about the stability and reliability of fiat-backed stablecoins. The report highlights that these stablecoins, which are designed to maintain a 1-to-1 peg to a fiat currency, have struggled to maintain their peg ratios consistently. Additionally, the lack of transparency and scrutiny in reserve practices adds further uncertainty to the viability of these stablecoins.
Peg Ratios and Deviations
In analyzing the performance of stablecoins, the BIS found that fiat-backed stablecoins were only able to maintain their peg ratio 94% of the time from January 2019 to September 2023. This falls short of the 100% assurance often promised in project white papers. Crypto-backed stablecoins and commodity-backed stablecoins performed even worse, with peg ratios of 77% and 50% respectively.
The BIS highlighted that only seven fiat-backed stablecoins managed to keep their deviations from the peg below 1% for more than 97% of their lifespan.
Tether (USDT) and USD Coin (USDC), the two most widely used stablecoins in the market, met this standard. However, other fiat-backed stablecoins experienced more frequent and larger deviations from their pegs.
The BIS notes that stablecoins backed by currencies like the euro or gold have also gained popularity in recent times. However, their performance in maintaining peg ratios was not explicitly mentioned in the report.
Lack of Transparency and Scrutiny
In addition to the concerns about peg ratios, the BIS raised red flags about the lack of scrutiny in stablecoin issuers’ reserve practices. The report reveals that some issuers do not engage independent certified public accountants to audit their reserves. Even when audits are conducted, there is a lack of a common reporting standard in reserve reports.
The BIS emphasized the potential uncertainties regarding the ability of stablecoins to convert users’ assets at par on demand and the potential financial stability implications in the event of a run.
The BIS further explains that the lack of transparency and standardized reporting makes it challenging to evaluate the quality of the underlying reserve assets of many stablecoins. As a result, it remains unclear whether these stablecoins would be able to convert users’ stablecoins at par on demand.
