Tether’s Paolo Ardoino is telling the Bank for International Settlements to stop acting like bank-led digital money is automatically safer, while the BIS says stablecoins still have too many cracks to serve as money at scale.
- Tether says fully reserved stablecoins beat fractional reserve banking
- The BIS wants tokenized deposits inside the banking perimeter
- Banks fear stablecoins could pull deposits away
- The fight is now about policy, control, and where digital dollars should live
The clash is really about two different models for moving dollars on blockchain rails.
Stablecoins are issuer liabilities backed by reserves, usually aimed at keeping a 1:1 peg with the dollar. Tokenized deposits are regular bank deposits represented on-chain, but the claim stays with the bank and settlement remains tied to the banking system. Same shiny interface. Very different plumbing.
The Bank for International Settlements made its case for tokenized deposits on Aug. 28, with General Manager Pablo Hernández de Cos speaking at the Jackson Hole Economic Symposium. His message was blunt: stablecoins still fall short on redeemability at par, interoperability, financial integrity, and monetary sovereignty. In BIS-speak, that means the thing can look like money without doing the job cleanly once scale arrives.
Ardoino was not buying the lecture.
“BIS is rightfully worried about the fact that stablecoins are exposing the emperor without clothes.”
He also pushed back on the whole premise that bank money deserves the benefit of the doubt. His argument is that stablecoins are fully reserved, unlike fractional reserve banking, where banks keep only part of deposits liquid and lend the rest. That setup is legal, familiar, and deeply embedded in modern finance, but it also means depositors are trusting a system that does not keep every dollar sitting idle in a vault.
Ardoino put the point in plain terms: why would anyone choose a savings product built on fractional reserves when a fully reserved alternative exists? He then warned that if people start realizing stablecoins are the better asset class, money could move quickly. “We’re in the Find Out phase, ” he said.
That is not just a spicy line. It is the core fear behind the bank lobby’s reaction to stablecoin growth: deposit flight. If users park more cash in digital dollars instead of bank accounts, banks lose cheap funding. That can mean higher funding costs, tighter lending, and eventually more expensive credit for households and businesses.
USDT is central to that tension. It remains the largest stablecoin by circulation, and Tether has increasingly framed it as a dollar-based savings and payments tool for people and businesses with limited access to U.S. dollars or conventional banking. Tether’s May investment in LemFi, a cross-border platform serving users across African and Asian remittance corridors, fits that strategy.
That is also why the BIS is uneasy. In many markets, USDT is not just a trading chip for degens and market makers. It is already behaving like digital cash for commerce, remittances, and short-term savings. When that starts to happen at scale, regulators stop thinking in terms of crypto rails and start thinking in terms of monetary control.
Hernández de Cos warned that wider use of dollar-denominated stablecoins outside the United States could deepen digital dollarization, meaning local economies become more reliant on the dollar than on their own currency. That can weaken monetary policy transmission, increase dependence on external monetary conditions, and chip away at local financial sovereignty. If people save in USDT, price goods in USDT, or settle business in USDT, the domestic currency gets pushed further to the margins. Central banks do not exactly throw parties for that outcome.
The BIS also highlighted a more mechanical issue: redeemability. A stablecoin is only as good as the ability to turn it back into dollars at face value when needed. That sounds obvious until stress hits. Secondary-market prices can drift, liquidity can thin out, and the 1:1 promise can get messy fast.
The source’s example makes the friction easy to see: someone holding USDT may need to pay a merchant who accepts only USDC, forcing a swap in a secondary market. That is not really a redemption issue so much as a liquidity and interoperability headache, but the practical point stands. If users have to keep hopping between coins, chains, and wallets, “money” starts behaving like a patchwork of IOUs with extra steps.
Interoperability is another word regulators use that sounds dry until it starts costing people money. If different stablecoins and networks do not connect cleanly, users get stuck paying bridging fees, taking conversion slippage, or relying on intermediaries to move value around. In stress periods, those frictions matter a lot more than they do when markets are calm and everyone is pretending the peg is made of tungsten.
The BIS also raised financial integrity concerns. Once stablecoins move across multiple networks and into self-custody wallets, anti-money laundering and counterterrorism financing controls get harder to enforce. That is the tradeoff. Open systems give users more freedom and fewer gatekeepers, but they also make life harder for compliance teams and regulators who want to know who is moving what, where, and why. Some people call that privacy. Others call it a nightmare. Both reactions are understandable.
Still, the BIS is not saying blockchain itself is the problem. Its preferred answer is tokenized deposits: bank deposits moved onto blockchain-style rails while staying inside the banking perimeter. The token is on-chain, but the liability remains on the bank’s books and settlement still flows through central bank accounts. The BIS says that preserves the singleness of money, the idea that bank money should remain interchangeable at par across institutions and payment systems.
That is the conservative path. It keeps the banking system in charge while giving it a nicer user interface. For institutions that want faster settlement without ripping up the current order, that sounds sensible. For people who want open access, self-custody, and money that does not depend on a bank’s balance sheet, it sounds like old finance wearing a blockchain costume.
And yes, banks are working on it. JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are developing a shared deposit token network through The Clearing House, with a target launch in the first half of 2027. The initial focus is multinational companies that need programmable treasury tools and cross-border payments. In plain English: the big banks want a controlled on-chain payment rail before stablecoins take too much of the market share.
SWIFT is moving too. In July, it launched a blockchain-based shared ledger with 17 major banks, including Citi, HSBC, UBS, and BNP Paribas. Elsewhere, Custodia Bank and Vantage Bank are testing a dual-purpose token model on the Ethereum-based Hazel network ahead of a planned fourth-quarter 2026 rollout.
Hernández de Cos said there is still no multi-bank or cross-jurisdictional ecosystem issuing tokenized deposits through a fully interoperable framework. What exists today is mostly concentrated on permissioned platforms, closed systems where only approved participants can transact, and some of those setups look a lot more like bank-issued stablecoins than a truly open network. That is the gap between the pitch deck and the real world.
The political battle is just as important as the technical one. Banking groups have been pushing lawmakers to tighten stablecoin reward provisions in the Digital Asset Market Clarity Act. In July, the American Bankers Association, the Independent Community Bankers of America, and 76 state banking associations urged Senate leaders to revise Section 404 before the bill reached the Senate floor. Their concern is straightforward: if stablecoins can offer attractive rewards, money may leave bank accounts, and community lenders will feel the squeeze first.
Citigroup CEO Jane Fraser echoed that worry in August while still supporting passage of the CLARITY Act. The logic is hard to miss. If deposits leave banks, funding costs rise. If funding costs rise, borrowing gets more expensive. That is not a theoretical spreadsheet problem; it is the mechanism that decides who gets credit and at what price.
The GENIUS Act, according to the source, prevents payment stablecoin issuers from directly paying interest or yield to holders. But that does not end the incentive game. Crypto exchanges and other service providers can still structure rewards in some cases, depending on how the product is built. Regulators may close one door and the market will immediately start testing the windows.
There is also a Treasury market angle. Hernández de Cos noted that stablecoin issuers can increase demand for government debt by holding reserves in U.S. Treasury securities. That can support demand for U.S. debt, but it also concentrates more financial plumbing in the hands of a few large issuers. The flip side of “more demand for Treasuries” is “more system exposure if those reserves or issuers run into trouble.” Nothing in finance comes without a catch.
The BIS’s broader warning is that if money keeps moving from bank deposits into stablecoins, the banking system may have to pay more to fund itself. That can ripple outward into higher borrowing costs for ordinary people and businesses. Stablecoin advocates like to talk about efficiency and freedom, which are real. They are less enthusiastic about admitting that the transition can reshape credit markets in ways that are not exactly friendly to the status quo, or to the average borrower.
The most likely end state is coexistence, though not a perfectly peaceful one. Hernández de Cos said stablecoins and tokenized deposits could both have roles, with tokenized deposits handling most everyday payments and stablecoins serving more specialized functions. That is probably the most realistic public stance the BIS can take: acknowledge that crypto-native money is not going away, then try to keep the core of the system inside the banking perimeter.
Whether that works depends on adoption, regulation, and whether banks can make tokenized deposits genuinely useful instead of just institutionally approved. Stablecoins already have the one thing banks do not: scale in the wild. Tokenized deposits have polished branding, compliance comfort, and a direct line to the existing financial system. Users will decide which matters more when the button actually has to be pressed.
Key questions and takeaways
-
What is the real fight here?
It is a battle over who controls digital dollars. Stablecoins push money onto open blockchain rails, while tokenized deposits keep the claim inside the banking system. -
Why is Tether pushing back on the BIS?
Ardoino argues that fully reserved stablecoins are safer and more useful than fractional reserve bank money, especially for savings and payments in markets with weak banking access. -
Why are banks worried about stablecoins?
They fear deposit flight. If customers move cash into stablecoins, banks lose funding, which can squeeze lending and raise borrowing costs. -
What does the BIS want instead?
It wants tokenized deposits: bank deposits moved on-chain but still backed by commercial banks and settled through central bank accounts. -
Can stablecoins and tokenized deposits coexist?
Yes, but the balance is not settled. The BIS sees tokenized deposits handling routine payments and stablecoins serving more specialized roles, while market adoption will decide how far each model goes. -
Why does monetary sovereignty matter?
If people outside the U.S. save and transact in dollar stablecoins, local currencies can lose ground and central banks can lose some control over domestic monetary conditions.
This debate is bigger than a technical argument over payment rails. It is about whether the next generation of digital money will be open and reserve-backed, or bank-controlled and permissioned.
Stablecoins have real flaws: peg risk, compliance headaches, and dependence on issuer discipline. Bank money has flaws too: opacity, fractional reserves, and a habit of asking users to trust institutions that did not exactly cover themselves in glory last time around. If stablecoins keep proving easier to use and more reliable in practice, the market will keep moving toward them whether the banking lobby likes it or not.
