The global financial landscape is undergoing a profound transformation, driven by rapid advancements in blockchain technology and the growing adoption of digital currencies. Among these innovations, stablecoins have emerged as a pivotal force reshaping cross-border payments, financial infrastructure, and monetary policy frameworks. With major jurisdictions like Hong Kong and the United States advancing regulatory clarity—Hong Kong’s Stablecoin Ordinance taking effect on June 6, 2025, and the U.S. Senate passing its stablecoin regulatory bill on June 17—stablecoins are now stepping into the spotlight of mainstream finance.
As this momentum builds, a critical question arises: Should China develop its own stablecoin ecosystem? And if so, how can it be aligned with national financial stability, the internationalization of the renminbi (RMB), and broader strategic goals?
The Rise of Stablecoins: Innovation Meets Regulation
Stablecoins are digital assets designed to maintain price stability by being pegged to reserve assets such as fiat currencies—most commonly the U.S. dollar. Leading examples include USDT (Tether) and USDC (USD Coin), which together dominate the $250 billion global stablecoin market, accounting for nearly 99% of all stablecoin issuance.
This explosive growth reflects strong demand for faster, cheaper, and more efficient payment solutions—especially within decentralized finance (DeFi) ecosystems. Stablecoins offer near-instant settlement, operate 24/7, and significantly reduce transaction costs compared to traditional banking rails.
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However, their cost advantage is not solely technological. Much of it stems from bypassing regulatory compliance, capital requirements, anti-money laundering (AML) checks, and correspondent banking overheads. Once stablecoins enter formal regulatory frameworks—as they inevitably will—their cost efficiencies may diminish. Real-world testing will ultimately determine whether they retain a sustainable edge in cross-border payments.
Opportunities and Risks in the Stablecoin Ecosystem
Advantages: Efficiency, Programmability, and Inclusion
Stablecoins bring several compelling benefits:
- Speed & Availability: Enable real-time, borderless transactions without reliance on legacy systems.
- Programmable Payments: Powered by smart contracts, they allow for automated, conditional payments—offering greater flexibility than traditional API-based treasury management.
- Financial Inclusion: Their open architecture increases access to digital financial services globally, particularly in underbanked regions.
Moreover, unlike closed-loop systems such as SWIFT or card networks, stablecoins operate on public or permissioned blockchains that support interoperability and composability—laying the foundation for an open, modular financial system.
Challenges: Monetary Policy, Financial Stability, and Dollar Dominance
Despite their promise, stablecoins pose significant challenges:
- Monetary Policy Transmission: If widely adopted outside central bank oversight, stablecoins could erode control over money supply and interest rates.
- Run Risk: Poor reserve management or panic-driven redemptions could trigger destabilizing "bank runs" on stablecoin issuers.
- Asset-Liability Mismatch: Most dollar-backed stablecoins hold short-term U.S. Treasuries. A sudden liquidity crunch in government bond markets could force fire sales, amplifying systemic risk.
- Digital Dollarization: With 99% of stablecoins pegged to the U.S. dollar, their global use reinforces dollar dominance and may threaten monetary sovereignty in emerging economies.
Three Models of Stablecoin Issuance
Globally, three primary models have emerged for issuing stablecoins:
1. Private Stablecoins (e.g., USDT, USDC)
Issued by private entities backed by high-quality liquid assets (HQLA), these offer agility and market responsiveness. However, they raise concerns about regulatory arbitrage, concentration risk, and reinforcing dollar hegemony.
2. Bank-Issued Deposit Tokens (e.g., JPM Coin)
These represent tokenized commercial bank deposits. Backed by regulated institutions and integrated into existing financial infrastructure, they offer strong risk controls and operational efficiency—already proven in interbank settlements.
Yet challenges remain around innovation speed, cross-bank interoperability, and potential consolidation of power among large banks.
3. “Wholesale-Retail” Two-Tier Model
This model aligns with traditional central banking architecture:
- Wholesale Layer: Central banks issue wholesale CBDCs to authorized institutions.
- Retail Layer: Licensed financial firms issue retail stablecoins backed by wholesale CBDCs.
This approach offers four key advantages:
- Preserves Systemic Stability: Avoids disintermediation by keeping commercial banks central to customer relationships.
- Ensures Monetary Unity: All retail stablecoins derive value from the same central bank money, preventing fragmentation.
- Enables Full Regulatory Oversight: Issuers must meet capital, liquidity, KYC/AML, and disclosure requirements.
- Supports Global Integration: Compatible with existing systems like SWIFT and CLS while enabling new forms of cross-border settlement.
Projects like Fnality (UK) and Helvetia (Switzerland) demonstrate the viability of this model. Similarly, Project Agorá, led by the BIS and NY Fed, explores deposit tokenization for cross-border payments—with growing participation from global financial institutions.
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Strategic Considerations for China
China’s financial system differs fundamentally from Western models. It emphasizes state oversight, financial stability, and serving the real economy—principles reinforced by the 2023 Central Financial Work Conference and the Third Plenum’s call to “develop offshore RMB markets.”
Given this context, here are key strategic considerations:
- Regulatory Readiness: Before embracing private stablecoins, China must strengthen its regulatory toolkit—ensuring robust oversight across institutions, behaviors, functions, and risks.
- Mission Alignment: While dollar stablecoins reinforce U.S. financial dominance, China’s goal should be to enhance RMB usability in trade and investment—not replicate speculative crypto dynamics.
- Beyond “Peer-to-Peer” Hype: The idea that decentralized payments eliminate intermediaries overlooks real-world complexities in trade finance—such as trust gaps, logistics timing, and fraud prevention. Traditional instruments like letters of credit still play vital roles.
- Avoiding Arbitrage Risks: Any offshore RMB stablecoin must account for onshore-offshore interest rate and exchange rate differentials to prevent destabilizing capital flows.
A Balanced Vision: Integrating Wholesale and Retail Innovation
Global attention has disproportionately focused on retail remittances—less than 10% of total cross-border payments. Meanwhile, wholesale transactions between governments, central banks, and financial institutions drive the majority of global capital flows and shape currency competitiveness.
True reform requires a dual-track strategy:
- Strengthen wholesale-level infrastructure through CBDCs and tokenized deposits to support large-value settlements.
- Expand retail accessibility via regulated stablecoins to improve convenience and adoption of digital RMB abroad.
Only by integrating both layers can a currency achieve true global relevance—combining systemic strength with user-centric design.
Frequently Asked Questions (FAQ)
Q: What are stablecoins?
A: Stablecoins are digital currencies pegged to stable assets like the U.S. dollar or government bonds. They aim to combine blockchain efficiency with price stability.
Q: Are stablecoins safe?
A: Safety depends on regulation and reserve transparency. Unregulated stablecoins carry risks like runs or asset mismatch; regulated ones backed by central bank money are far more secure.
Q: Can stablecoins replace traditional banking?
A: Not entirely. While they improve efficiency, banking functions like credit creation and risk assessment remain essential. The future likely involves integration—not replacement.
Q: How do stablecoins affect monetary policy?
A: Widespread use outside central bank control could weaken policy transmission. A regulated two-tier model helps preserve central bank authority.
Q: Is China developing a stablecoin?
A: While no official retail stablecoin exists yet, China is exploring offshore RMB tokenization through bank-issued deposit tokens within a regulated "wholesale-retail" framework.
Q: Will stablecoins make international payments cheaper?
A: Potentially—but only if regulatory costs don’t erase current savings. Efficiency gains are clearer in institutional settlements than consumer remittances.
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