BIS Warns Stablecoins Like Tether Pose Systemic Financial Risks

BIS head Pablo Hernández de Cos warns that Tether and USDC could bypass regulations and destabilize the banking system through deposit substitution.

According to BIS head Pablo Hernández de Cos, tokens such as Tether and USD Coin create “serious risks to financial integrity” and could be used to bypass regulations, including capital restrictions and tax regimes.

Banks lose deposits as lending contracts

One of the key mechanisms identified by the BIS and the European Central Bank is so-called “deposit substitution.”

In this process, households transfer funds from bank accounts to stablecoins, depriving banks of their cheapest source of funding. To compensate, financial institutions must rely on more expensive market financing, which limits their ability to issue loans.

Consequently, the effect is transferred directly to the real economy, slowing growth even without additional interest rate hikes.

Monetary policy loses effectiveness

The proliferation of stablecoins also calls into question the effectiveness of monetary policy. If a significant portion of liquidity moves outside the traditional banking system, central bank decisions—such as changes in interest rates—may have a weaker and slower effect on the economy.

This risk is particularly pronounced in countries outside the US, where dollar-pegged tokens function as a “digital substitute” for the local currency. This limits the ability of national central banks to control inflation and liquidity.

Pressure on the government debt market

In parallel, the industry is becoming an increasingly large player in the US Treasury market. New analyses reveal that the inflow of billions of dollars into stablecoins could lower the yield of short-term US bonds by several basis points.

However, this dependence carries systemic risk. A panic involving stablecoins could force their issuers to sell massive quantities of bonds, risking a significant impact on financial markets.

Regulatory pressure intensifies

The BIS comments come at a time of increased scrutiny from regulators toward the crypto industry.

Stablecoins, recently viewed as a bridge between traditional finance and the blockchain ecosystem, are increasingly perceived as a potential source of systemic risk.

The question for policymakers is no longer whether to regulate the sector, but how to do so without stifling the innovations that underpin digital finance.

In the short term, the debate will focus on reserve transparency and liquidity management. In the long term, the focus shifts to whether stablecoins will remain a supplement to the financial system or become a competitive alternative to it.