Zhao Yao: New Thoughts in the Wave of Stablecoins

Author: Zhao Yao

On June 6, 2025, the Stablecoin Regulation in Hong Kong, China officially came into effect. On June 17, the U.S. Senate officially passed the stablecoin regulation bill.

Currently, stablecoins pegged to the US dollar, such as USDT (Tether) and USDC (USD Coin), are rapidly expanding globally. Central banks are researching and exploring central bank digital currencies ( CBDC ), and financial institutions are also launching various types of tokens (tokenisation), presenting a rich and diverse digital currency ecosystem.

The above message has already sparked a wave of discussions about stablecoins, raising a thought-provoking question: In the global digital currency wave, does China need to develop stablecoins?

On June 18, the Governor of the People's Bank of China, Pan Gongsheng, first mentioned "stablecoins" and pointed out that they "reshape the traditional payment system from the ground up, significantly shorten the cross-border payment chain, and also pose a huge challenge to financial regulation."

As the world's second-largest economy and a leading country in financial technology, how should China continue to promote the internationalization of the Renminbi and financial innovation while maintaining financial stability? For example, in the "wholesale-retail" dual system, besides technology companies, is it worth exploring the issuance of deposit tokens (also known as deposit currency tokenization, distinct from private stablecoins) with offshore Renminbi characteristics by banking financial institutions?

A privately-run stablecoin (hereinafter referred to as "stablecoin") is a type of cryptocurrency designed to maintain price stability, typically pegged to a specific asset (such as the US dollar) to avoid the price volatility issues associated with traditional cryptocurrencies.

With features such as instant settlement and low-cost transfers, stablecoins issued by private institutions (including non-bank institutions, large technology companies, and innovative enterprises) are rapidly developing globally.

The global stablecoin market size has grown from less than $5 billion at the beginning of 2020 to the current $250 billion, with USD stablecoins accounting for 99%. Among USD stablecoins, USDT accounts for about 70%, followed by USDC. This reflects the strong demand for efficient and low-cost payment methods in the market, especially after the rise of crypto assets and De-Fi (decentralized finance); on the other hand, it also fully demonstrates the high concentration of the stablecoin market, which is far greater than that of traditional financial markets.

This type of stablecoin that is detached from the central banking system brings new opportunities for monetary management, financial stability, and macroprudential policies for sovereign nations, but it also presents challenges.

In terms of opportunities, private stablecoins have a clear advantage in the efficiency of capital transfer. They enable all-weather, instant settlement of cross-border capital transfers, significantly reducing transaction time.

At the same time, some popular opinions suggest that the cost of cross-border transactions using stablecoins is significantly lower than that of the traditional financial system (a reduction of 90% or more). In fact, the cost advantage of stablecoins in cross-border transactions does not completely stem from innovations in blockchain technology. According to the author's research on the front lines of business, a typical B2B (business-to-business) cross-border payment has fixed costs ranging from $25 to $35, with liquidity costs related to the correspondent banking network, operational costs, and compliance costs accounting for approximately 35%, 30%, and 20%, respectively.

The cost of cross-border transactions using stablecoins is relatively low, mainly because the issuers of stablecoins save on various regulatory and capital costs that traditional financial institutions bear. Additionally, in the circulation phase, they also avoid the legal costs associated with "Know Your Customer" (KYC), the "three countermeasures" (anti-money laundering, anti-terrorist financing, and counter-proliferation financing), and the legal compliance connection for cross-border transactions. Currently, stablecoins do not involve the costs associated with correspondent banking networks or currency exchange. In the future, once stablecoins enter a regulatory compliance framework, they will also bear the various costs that traditional cross-border payments incur, and their cost advantages in cross-border payments will still need to be validated in practice.

In addition, stablecoins have an important advantage, which is the programmability in payment aspects and the composability in asset aspects brought by blockchain and smart contract technology. Blockchain-based smart contracts and their applications are more collaborative, intelligent, and customizable compared to existing API-based corporate treasury services, which are also known as cash management services domestically. This is the mainstream development direction for the digitalization of payment and settlement. At the same time, compared to the relatively closed payment and settlement systems based on agent bank networks, the "one chain, one network, one platform" of stablecoins is more open and inclusive, helping to enhance the accessibility, global reach, and inclusiveness of digital financial services.

In terms of challenges, first, the transmission mechanism of monetary policy may be under threat. Stablecoins circulate on a large scale outside the "central bank-commercial bank" system, in a shadow banking model, which may weaken the central bank's ability to manage money supply and interest rates.

Secondly, the risk of financial instability is increasing. Firstly, poor reserve management by stablecoin issuers may trigger "bank run" risks; secondly, if there is a "liquidity flash crash" in U.S. Treasury bills, the safety asset attribute may be shaken, potentially amplifying market risks several times and transmitting them to stablecoins, causing a flash crash in stablecoin prices. Conversely, there will be a more significant maturity mismatch between the liabilities of stablecoins and the assets of Treasury bonds. Once there is a large-scale bank run on the liability side, it will transmit to the asset side, forcing stablecoin issuers to sell Treasury bond assets en masse, leading to systemic financial risks.

Finally, 99% of stablecoins are pegged to the US dollar, and their borderless cross-border circulation has led to the issue of digital "dollarization." From a macro-prudential perspective, stablecoins may exacerbate the volatility of cross-border capital flows, posing challenges to financial stability in emerging market countries.

Three Main Issuance Models

Currently, the issuance of stablecoins can be broadly divided into three models. The first model is the purely private company issuance model, that is, private stablecoins, which are backed by high-quality liquid assets (HQLA), especially U.S. Treasury bills. USDT and USDC are typical representatives of this model; they operate based on market mechanisms, are highly innovative, and can quickly respond to changes in market demand. However, this model faces the various challenges posed by stablecoins mentioned above. Most importantly, because it is primarily pegged to the U.S. dollar, it reinforces the international dominance of the dollar, which is unfavorable for the diversification process of the international monetary system.

The second type is the bank deposit token model, such as JPMorgan's JP.M Coin, which essentially tokenizes traditional bank deposits. This model is issued by licensed banks and is supported by their balance sheets, making full use of the existing banking regulatory framework. Risk control is relatively mature, and it can be deeply integrated with existing financial services. JPMorgan's JP.M Coin has achieved success in the field of inter-institutional large-value settlement, significantly improving settlement efficiency. However, this model also faces challenges such as limited innovation, insufficient interoperability, and the potential to reinforce the market advantages of large banks.

The third type is the "wholesale-retail" dual-layer system of stablecoin issuance, which uses wholesale CBDC( central bank digital currency) as the settlement support to construct a retail stablecoin payment system. This model continues the dual-layer structure of the traditional financial system, where the central bank is responsible for the issuance and management of the wholesale layer CBDC, and commercial institutions or payment service providers (PSPs) are responsible for retail payment services aimed at the public. This model has four advantages:

First, it does not detach from the existing two-tier system. By inheriting and optimizing the two-tier architecture, it achieves "maintaining integrity and innovating" for stablecoins. At the wholesale level, the central bank provides settlement support for stablecoin issuers through wholesale CBDC, ensuring the finality of payments in the payment system is backed by the central bank's credit, effectively avoiding the financial stability risks caused by stablecoin issuers selling off risk-free assets like government bonds in the absence of the original conditions of a "lender of last resort". At the retail level, stablecoin issuers and payment service providers are responsible for providing stablecoin services to the public, maintaining direct contact with customers. This design avoids the operational pressure on the central bank from facing a massive number of retail users directly, and also prevents financial disintermediation risks, preserving the key financial functions of existing financial intermediary institutions.

Second, ensure the unity of the currency. A dual-layer architecture can avoid the risks and efficiency losses caused by the coexistence of too many forms of currency. In this model, although there may be multiple licensed institutions participating in the issuance of stablecoins at the retail layer, the value support for these stablecoins uniformly comes from the central bank's wholesale CBDC. This ensures that stablecoins are essentially different transaction mediums of the same legal currency, rather than competing multiple currencies, which would not lead to price system chaos, payment system fragmentation, and currency substitution issues.

Thirdly, financial activities should be comprehensively brought under regulation. Under this model, institutions participating in the issuance and servicing of retail-level stablecoins must obtain the corresponding financial licenses and implement regulations in areas such as capital adequacy, reserve management, information disclosure, and customer identity verification, in accordance with the principle of "same business, same risk, same regulation."

Fourth, it does not challenge the existing international financial operation framework. At the wholesale level, through cooperation among central banks, a cross-border settlement mechanism for wholesale CBDCs can be established, creating a super-sovereign digital currency based on a basket of wholesale CBDCs (such as digital SDRs), providing a financial safety net for the global liquidity of stablecoins. At the retail level, this model can be compatible and interconnected with existing agent bank networks (SWIFT), card network organizations (VISA, Mastercard, UnionPay International, etc.), and payment systems (FPS interconnection, CLS, etc.), which not only helps stablecoins play a constructive role in international financial governance but also avoids the sunk costs required to establish a completely new international payment system.

In fact, the UK Fnality project has been exploring the "wholesale-retail" dual-layer system stablecoin issuance model since 2018. This project is jointly initiated and participated by several major financial institutions globally, aiming to utilize Distributed Ledger Technology (DLT) to build a regulated token payment network that provides safe and efficient solutions for wholesale payments and cross-border settlements. The Swiss National Bank's and the Swiss Stock Exchange's innovative project Helvetia is also a practical case of the "wholesale-retail" dual-layer system model, demonstrating the feasibility and multifaceted advantages of wholesale CBDCs. The above examples indicate that this model can truly achieve the policy goal of "regulated stablecoins."

Thoughts and Suggestions

As multiple countries and regions around the world successively regulate stablecoins, whether China should issue a renminbi stablecoin and how to issue it has also become a topic worth discussing.

First of all, it is important to note that there are essential differences in the structural framework of the financial systems between China and the West. The United States has a highly market-oriented financial system, with the US dollar enjoying the "arrogant privilege" as the world's main reserve currency. Coupled with the fact that developed economies generally face high government debt pressures, the policy sector naturally supports private stablecoins more. China's financial system emphasizes a combination of effective markets and proactive government intervention. The 2023 Central Financial Work Conference emphasized the need to comprehensively strengthen financial regulation and effectively prevent and resolve financial risks. Before establishing a new quality regulatory capability characterized by "institutional regulation, behavioral regulation, functional regulation, penetrating regulation, and continuous regulation," it is still necessary to prudently assess the pros and cons of private issuance of stablecoins.

Secondly, it is necessary to consider the differences in national financial strategies that stablecoins can carry. The mission of the US dollar stablecoin is to consolidate the international status of the dollar, while China's push for the internationalization of the renminbi aims to better serve the high-quality development of the real economy. Only when stablecoins are organically integrated into the institutional opening process of the financial sector can they realize their strategic and economic value.

Again, the "peer-to-peer" decentralization actually ignores the dual information asymmetry problem of time and space in international trade settlement. Over a long period of cross-border trade activities, people have gradually realized that cross-border trade (logistics) and cross-border payment (fund flow) cannot remain synchronized, which led to the invention of bills of exchange; to avoid goods loss or financial fraud, various intermediary institutions such as banks, insurance, notarization, and inspection were gradually introduced, developing various trade settlement tools like letters of credit, collection, and wire transfer, thus promoting the prosperity of trade finance. In the complex and diverse trading scenarios, the scenarios applicable to wire transfers, which are closest to "peer-to-peer" payments, are actually very few. The extent to which "peer-to-peer" payments can play an advantage in cross-border trade still needs to be verified through practice.

Ultimately, the emergence of digital currencies, including retail CBDCs and stablecoins, does not signify the birth of a new type of international monetary system that transcends sovereignty. From a wholesale perspective, wholesale CBDCs, as central bank money, possess an undeniable finality of settlement and can fully leverage their "payment versus settlement" advantage.

The Decision of the 20th Central Committee of the Party requires the "development of the offshore RMB market." In the "wholesale-retail" two-tier system, in addition to non-financial institutions such as technology companies, the issuance of deposit tokens with offshore RMB characteristics by banking financial institutions is also a direction worth exploring. For example, the deposit token cross-border payment project - Project Agorá, jointly led by the Bank for International Settlements (BIS) and the New York Federal Reserve (NY Fed) along with multiple central banks, has already seen participation from many large financial institutions globally and is continuously expanding its member network.

It is important to note that when considering the issuance of offshore RMB stablecoins, it is necessary to incorporate the interest rate differentials between onshore and offshore RMB into the prudent framework. Recklessly allowing the issuance of offshore RMB stablecoins may attract certain issuers to engage in cross-border arbitrage activities, triggering risks of interest rate and exchange rate arbitrage.

We need to recognize the systemic biases that exist in the current global development of digital currencies. In the field of cross-border payments, retail-level cross-border remittances account for less than 10% of the total global cross-border payment volume, with a relatively limited market size; meanwhile, inter-institutional cross-border payments (including governments, international financial organizations, and financial institutions) occupy an absolute proportion and are a key force affecting the global cross-border payment ecosystem and even the international monetary system. Unfortunately, both the G20 cross-border payment roadmap and the main players in the stablecoin market have placed too much emphasis on the retail-level cross-border remittance field, showing a clear lack of attention to the wholesale-level cross-border payments. This has hindered the formation of synergy in global digital currency innovation and exacerbated the vulnerabilities of the international monetary system.

Reforming the global cross-border payment system requires more comprehensive and systematic thinking. Wholesale cross-border payments form the micro foundation of the international monetary system and are a key factor influencing the international status of currencies. Although the scale of retail cross-border remittances is relatively small, it plays an important role in enhancing the international availability and usability of currencies. The two are complementary and cannot be neglected. The "wholesale-retail" dual-layer system is based on this systematic perspective, organically combining the two levels, valuing the foundational role of the wholesale layer while also focusing on the inclusive value of the retail layer.