CICC: Economic Analysis of Stablecoins
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CICC: Economic Analysis of Stablecoins
Analyzing the economic logic of stablecoins and the implications for public policy.
Navigating Web3 tides with focused insightsResearcher: Peng Wensheng, CICC
Introduction
Stablecoins are privately issued currencies pegged to fiat money. The operational model of dollar stablecoins resembles the concept of narrow banking: issuers’ liabilities (stablecoins) carry zero interest, while the safe assets held as redemption backing generate yield. Stablecoin supply is highly elastic. In recent years, rising U.S. interest rates have widened the interest margin, incentivizing issuers to expand supply. However, because stablecoins pay no interest, their circulation volume is primarily demand-driven.
Demand arises because users are willing to forgo interest income in exchange for other benefits—such as use in crypto asset trading, lower cross-border payment costs compared to traditional banking systems, regulatory arbitrage, or serving as an alternative to unstable local currencies.
Theoretically, similar functions could be achieved through stablecoins pegged to other currencies. However, the U.S. dollar’s status as the dominant international reserve currency confers first-mover advantages, including established networks and scale effects, placing non-dollar stablecoins at a competitive disadvantage. This may explain why the European Central Bank advocates issuing a digital euro (a central bank digital currency, or CBDC), rather than relying on euro-denominated stablecoins, to counter the challenge posed by dollar stablecoins.
For China, the priority should be promoting the use of third-party payment tools like WeChat Pay and Alipay in cross-border payments. From an economic mechanism perspective, these platform-based digital currencies function similarly to RMB-pegged stablecoins. They already benefit from strong network effects and economies of scale within China. Compared to dollar stablecoins, RMB platform currencies exhibit stronger real-economy attributes and weaker financial characteristics, better leveraging China's scale advantages in manufacturing and finished goods trade.
Second, central bank digital currencies (CBDCs), as an exogenous force, can help counteract the endogenous market dominance of incumbent international currencies—for instance, by building cross-border payment infrastructure through multilateral CBDC cooperation.
Third, as a new form of payment technology and business model, dollar stablecoins may generate unforeseen positive spillovers that are not yet fully visible. A complete rejection would not be optimal. Instead, Hong Kong—as a global financial center and the largest offshore RMB hub—could serve as a pilot zone for testing RMB-pegged stablecoins under controlled conditions.
Main Text
Recently, developments in the cryptocurrency space—particularly the growth of dollar stablecoins—have drawn significant attention. Since returning to the White House, the Trump administration has made several statements regarding digital assets, including supporting the development of dollar-backed stablecoins, opposing the Federal Reserve’s issuance of a central bank digital currency (CBDC), and advocating for inclusion of Bitcoin and other cryptocurrencies in national reserve assets. Recently, U.S. Treasury Secretary Bessent stated at the first White House Digital Assets Summit that the United States “will maintain the dollar’s position as the world’s leading reserve currency” and “will use stablecoins to achieve this goal.”[1]
Other countries and regions have responded accordingly. ECB President Lagarde recently emphasized the need to swiftly establish a legislative framework to pave the way for a potential digital euro (a CBDC), addressing challenges posed by the rapid rise of stablecoins and crypto assets. Interestingly, she did not propose euro-denominated stablecoins as a response.[2] Meanwhile, Hong Kong passed the Draft Stablecoin Ordinance, allowing licensed institutions to issue fiat-pegged stablecoins under defined regulatory requirements.[3]
Stablecoins are not just a globally debated topic—they represent a real and unfolding economic phenomenon with potentially profound implications for the global financial architecture. This paper seeks to analyze the economic logic behind stablecoins and their public policy implications.
I. What Are Stablecoins? And What Are They Not?
Stablecoins are a type of cryptocurrency designed to maintain relative price stability by being linked to specific underlying assets.[4] Currently, dollar-pegged stablecoins backed by highly liquid assets (e.g., USDT, USDC) account for over 90% of total stablecoin market capitalization.[5] This analysis focuses exclusively on such dollar-pegged stablecoins. Stablecoin transactions occur in primary and secondary markets. In the primary market, issuers typically guarantee 1:1 redeemability into U.S. dollars, but participation thresholds are high—usually limited to institutional users who meet Know Your Customer (KYC) requirements—and redemptions involve processing delays. In the secondary market, prices are determined by supply and demand and may deviate from the $1 peg. Stablecoins possess both technological and monetary features worthy of note.
(1) Digital Technology Enhances Payment Efficiency, But Does Not Eliminate Centralization
Theoretically, stablecoins operate on blockchain-based distributed ledgers and thus possess decentralized attributes. Additionally, they can embed smart contracts enabling applications in decentralized finance (DeFi)—such as lending and trading—executed automatically without traditional intermediaries, facilitating fast and low-cost settlements. In practice, however, decentralization is constrained. For example, companies issuing USDT and USDC retain control over issuance, redemption, and reserve management, exhibiting notable centralization.
(2) From Holders’ Perspective, Stablecoins Are Private Money, Not Government-Issued Currency
Under the proposed U.S. Generative and Innovative Uses of Stablecoins Act (GENIUS Act) of 2025, stablecoin issuers are prohibited from paying interest to holders.[6] The bill also mandates that issuers hold reserves of highly liquid assets at a minimum 1:1 ratio. In monetary terms, stablecoins are essentially private money based on both U.S. dollar credit and issuer credibility.
(3) From Issuers’ Perspective, the Stablecoin Model Resembles "Narrow Banking"—It Is More Than Just a Liability
The stablecoin business model mirrors that of narrow banking. Traditional banks engage in maturity transformation—using short-term deposits to fund long-term loans—creating liquidity risk, which has historically led to bank runs. Modern central banking systems enhance financial stability through layered regulations, including liquidity facilities, deposit insurance, capital adequacy rules, and macroprudential policies. In contrast, stablecoins resemble narrow banking, where operations are strictly limited to holding low-risk, highly liquid assets such as cash and short-term government bonds. By maintaining full—or even excess—reserves, issuers ensure convertibility and avoid crises stemming from maturity mismatch, credit risk, or speculation. In this framework, money creation is separated from credit extension. As envisioned in theoretical models like the “Chicago Plan,” narrow banks act solely as “money warehouses,” safeguarding deposits and providing payment services, while credit provision (e.g., corporate lending) is handled by non-bank financial institutions, with strict legal and financial separation between the two.
(4) China Already Has RMB Stablecoins: WeChat Pay and Alipay
From an economic mechanism standpoint, third-party payment platforms function similarly to stablecoins, and China holds a comparative advantage in this domain, supported by a relatively mature regulatory framework. Chinese digital payment platforms like WeChat Pay and Alipay lead globally. “WeChat Wallet” and “Alipay Balance” represent user claims against payment providers, enabling instant top-ups and withdrawals to bank cards, and seamless usage across consumption, transfers, and financial services. Under the centralized custody system for customer escrow funds, these balances must be fully deposited with the People’s Bank of China (recorded as “deposits from non-financial institutions” on the PBOC’s balance sheet), constraining how payment institutions use funds and ensuring user asset security. Thus, like offshore stablecoins, these platform currencies extend fiat money by maintaining a 1:1 parity mechanism. However, their stabilization mechanism is stricter—customer escrow funds are effectively guaranteed by central bank base money—and tighter regulation limits their financial expansion more rigorously than foreign stablecoins.
II. As a Payment Tool, What Costs Can Stablecoins Reduce—and What Can’t They?
Currently, stablecoin adoption in everyday retail payments remains minimal due to limited use cases. Platforms like WeChat Pay, Alipay, Apple Pay, and PayPal have already achieved strong network effects and economies of scale, giving them first-mover advantages. Within a single currency area, stablecoins offer no clear superiority over existing third-party payment systems in convenience or security. Their cost-reduction potential lies mainly in cross-border payments.
What gives stablecoins a cost advantage in cross-border transactions? A relatively competitive market structure appears key. Traditional banking systems provide dollar cross-border remittance and payment services, but clearing systems are highly centralized. For example, the Clearing House Interbank Payments System (CHIPS) handles about 96% of global dollar payments.[7] Card networks are dominated by oligopolies like Visa and Mastercard, whose first-mover advantages and scale create high entry barriers and concentration, driving up transaction costs.
Third-party digital payment platforms reduce private-sector transaction costs compared to traditional cross-border systems and offer greater fee transparency. These platforms often integrate digital wallets, and diverse user demands push providers to continuously upgrade services, fostering differentiation across regions and use cases. Many have carved out niches—Stripe, for instance, offers low cross-border fees and customizable solutions primarily for large-volume or internationally active online businesses. Yet, merchant-side (i.e., payee) transaction fees remain relatively high.
Stablecoins’ open architecture and infrastructure make it easier to build a more competitive market landscape, bypassing legacy systems to enable low-cost cross-border payments. First, their digital nature allows new technologies to reduce fees—for example, competition among public blockchains can drive down gas fees. Second, the stablecoin market is relatively competitive, with multiple current and potential issuers globally, helping keep transaction costs low. Third, stablecoins face lighter regulation than traditional systems, creating room for regulatory arbitrage. In contrast, banks face stringent requirements on capital adequacy, deposit insurance, liquidity, anti-money laundering (AML), and KYC. Third-party payment platforms are subject to clear rules on licensing, fund custody, AML, and cross-border settlement. Stablecoins, by comparison, often feature strong anonymity, can circumvent traditional cross-border clearing systems, and avoid strict foreign exchange or capital flow controls.
Notably, stablecoins can reduce costs for cross-border payments within the same currency, but when different currencies are involved, the picture is more complex. Stablecoins do not eliminate currency conversion costs, which stem from local banking systems, AML checks, and capital account restrictions that add friction. Of course, given the dollar’s role as the dominant intermediary in global trade, most currency pairs are traded via USD. This cost advantage stems from the dollar’s status as the primary medium of exchange—not from inherent technological superiority. In purely technical terms, dollar stablecoins do not necessarily outperform third-party payment tools or CBDCs of other currencies. A key implication is that stablecoins in non-dollar currencies face far greater constraints in reducing cross-border transaction costs compared to dollar stablecoins.
III. High Supply Elasticity: Stablecoin Circulation Is Largely Demand-Driven
From the supply side, stablecoin issuers earn profits from the spread between asset yields and zero-interest liabilities. Liabilities (stablecoins) bear no interest, while assets—such as Treasuries and bank deposits—generate returns. The larger the net interest margin (after operating costs), the stronger the incentive to issue more. Theoretically, as long as the margin is positive, supply could be unlimited. Dollar stablecoin market cap grew from a few billion in 2020 to over $220 billion by Q1 2025, representing 99.8% of all fiat-pegged stablecoins.[8] During this period, U.S. short-term interest rates rose from near zero during the pandemic to around 4% today,[9] generating nearly risk-free windfall profits for issuers. This helps explain the growing number of institutions eager to enter the stablecoin market.
Given high supply elasticity, stablecoin circulation is effectively demand-determined. As non-interest-bearing instruments, people hold only what is needed for transactions. While precautionary balances exist due to transaction uncertainty, the size of such balances depends partly on the opportunity cost—the foregone interest. When deposit or Treasury yields rise, the cost of holding zero-yield assets increases, reducing demand for precautionary holdings. Thus, rising U.S. interest rates should suppress stablecoin demand. So how do we reconcile this with the observed surge in dollar stablecoin usage?
Put differently, the interest forgone by stablecoin holders is the price paid for the convenience they receive. Higher interest rates reduce stablecoin balances, but increase the per-unit convenience benefit. What kinds of benefits justify this rising opportunity cost?
First, currency substitution. The U.S. dollar, as the incumbent international currency, serves as a global liquidity and safe asset, especially valuable in high-inflation or rapidly depreciating currency environments. Surveys show rising stablecoin adoption intentions in developing countries like Turkey, Argentina, Indonesia, and India. In hyperinflation-prone Turkey, for example, purchases of stablecoins with fiat amounted to 3.7% of GDP in 2023.[10] However, this substitution effect likely has limits. From a store-of-value perspective—and considering higher interest rates—dollarization should manifest more in interest-bearing dollar assets, such as dollar deposits in local banks. Another possibility is that stablecoins substitute for physical dollar cash. Yet, there is little evidence that this is significant. Both cash and stablecoins pay no interest, but stablecoins offer portability and no risk of physical damage—advantages in large transactions—while cash avoids counterparty risk.
Second, traditional cross-border trade payments. Legacy systems suffer from high costs and inefficiencies due to centralized infrastructure monopolies, complex processes, and cascading compliance costs. Stablecoins offer an alternative that bypasses or simplifies these layers, using digital means to enable more direct cross-border payments, breaking entrenched structures and lowering fees. For cross-border e-commerce sellers and individuals or small businesses conducting frequent micro-transactions, this cost reduction is highly attractive, potentially driving demand.
However, reducing cross-border payment costs is not exclusive to stablecoins. Platforms like PayPal also have the potential to disrupt traditional cross-border payment monopolies.
Third, crypto asset trading. Over the past few years, sharp rises and volatility in Bitcoin and other crypto assets have increased demand for dollar stablecoins as trading collateral. Stablecoins serve as primary intermediaries in crypto trading and as safe havens during periods of price turbulence in major cryptos like Bitcoin.[11] Whether the Bitcoin market is rising or falling, derivatives such as futures and perpetual contracts sustain demand for stablecoins as margin assets.
Fourth, underground economic activities, regulatory arbitrage, and sanctions evasion. The anonymity of stablecoin transactions makes them difficult to trace and regulate, facilitating illicit and non-compliant transactions. In cross-border contexts, they can circumvent capital controls, complicating tax collection and AML enforcement. The returns from evading regulation constitute a convenience benefit for holders, fueling demand. Stablecoins can also bypass the U.S.-dominated international payment system, helping countries evade financial sanctions in geopolitical competition. For example, Russia has turned to stablecoins to facilitate oil trade with other nations, using USDT as a bridge for bilateral settlements. Iran and Venezuela have similarly used cryptocurrencies for trade settlements.[12]
Among these four possibilities, so far the third and fourth appear most plausible—and interconnected. Crypto trading and gray-market demand reinforce each other in lightly regulated offshore jurisdictions, where most crypto exchanges are based, making regulatory enforcement and international coordination difficult.[13]
IV. Future Potential: What Stablecoins Can and Cannot Do
What is the future growth potential of stablecoins? Like cash, demand deposits, or escrow funds in third-party payment systems, stablecoin circulation is primarily driven by transaction needs. This leads to an important insight: within a single currency area, where none of these instruments pay interest, stablecoins offer no clear advantage over cash, checking accounts, or existing payment platforms. While anonymity facilitates underground activity, this creates a feedback loop that could strengthen shadow financial systems focused on gray-market transactions. It is hard to imagine monetary authorities tolerating such regulatory arbitrage indefinitely. Therefore, stablecoins’ growth potential lies predominantly in cross-border economic activity.
(1) Dollar Stablecoins Benefit First from the Dollar’s Global Status
At the international level, the incumbent’s network advantage means the dollar is best positioned to benefit from stablecoin market mechanisms. In other words, the rapid growth of dollar stablecoins is first a result of the dollar’s international role. Can stablecoins in turn reinforce or even expand the dollar’s dominance? That depends on their performance across the three core functions of money: unit of account, medium of exchange, and store of value. Currency substitution can occur in all three, but which matters most?
A sovereign currency’s role as a unit of account rests on government backing—a core expression of national economic sovereignty. The extent to which this public authority extends internationally—or erodes domestically—is reflected in competition over payment and store-of-value functions.
As discussed, dollar stablecoins benefit from the dollar’s incumbent advantage in payment efficiency. Moreover, in terms of regulatory arbitrage, the U.S. financial system is more liberalized than others, meaning regulatory arbitrage poses fewer risks domestically, further strengthening the position of dollar stablecoins.
What underpins the dollar’s international competitiveness? Primarily its role as a store of value. The U.S. financial market is large, deep, broad, and among the most open of major economies, attracting global investors. In particular, U.S. Treasuries serve as the world’s premier safe asset. Dollar stablecoins leverage the dollar’s incumbent status as a reserve currency, while also serving as a new technological vehicle extending the dollar’s global reach as a store of value.
(2) Dollar Stablecoins May Reinforce Dollarization—but Face Two Constraints
Globally, currency competition is zero-sum: gains for the dollar mean losses for others. Based on the above, two types of countries are most affected: (1) developing nations with weak financial systems, small economies, and volatile inflation and exchange rates; and (2) countries with capital controls. Their losses manifest in two ways. First, seigniorage and related revenues are eroded—the interest forgone by stablecoin holders flows to issuers and, indirectly, to the U.S. government, which benefits from lower borrowing costs due to increased demand for dollar-denominated safe assets. Second, the effectiveness of monetary policy diminishes. While stablecoins remain small in scale, regulators are still observing. But as issuance grows, negative impacts will become evident, prompting policy responses—including tighter regulation—to curb demand for dollar stablecoins.
Second, stablecoins themselves are fragile. Although pegged to the dollar, they are ultimately private instruments issued by private entities. Compared to regulated and protected payment systems under central banking frameworks—including third-party platforms like WeChat Pay and Alipay—private-sector-led stablecoins may lack sufficient capacity or incentive to ensure safety. This includes technical vulnerabilities—such as flaws in blockchain consensus mechanisms or smart contracts—as well as economic risks, particularly regarding redeemability.
Even though stablecoin issuers claim to hold 100% liquid reserves, confidence in the peg can still collapse. There have already been multiple episodes of mass redemptions or sell-offs in short periods, overwhelming the backing mechanism and causing de-pegging—such as USDC’s rapid deviation after Silicon Valley Bank’s collapse in 2023. In the digital age, information—including misinformation—spreads quickly. Rumors of insufficient reserves could trigger panic-driven bank runs, amplified by herd behavior.
Looking ahead, issuers may have incentives to leverage for profit—holding illiquid or risky assets—turning them into modern-day “wildcat banks.” Tether, for example, holds not only high-quality cash and equivalents, but also volatile assets like Bitcoin and precious metals, plus opaque secured loans and other investments.[15] Some argue that while Circle maintains full reserve compliance for USDC, Tether’s reserves include nearly 20% of assets that fall short of the GENIUS Act standards—yet these very assets are Tether’s main source of profit.[16]
Notably, narrow banking, as a financial reform idea, has never been fully implemented in reality, largely because financial institutions tend to expand their functions. Stablecoins are still in early development and currently benefit from high interest margins. Looking forward, if the Fed cuts rates and Treasury yields decline, stablecoin issuers’ interest margins will shrink significantly. Profit motives could then drive expansion beyond narrow banking—increasing credit and maturity risk in asset portfolios, thereby heightening issuer credit risk.
V. From Cryptocurrency to Reserve Asset?
Another recent topic related to dollar stablecoins (and crypto more broadly) is the U.S. government’s reported plan to establish a “Strategic Bitcoin Reserve” and a broader “U.S. Digital Asset Reserve” including non-Bitcoin digital assets.[17] Reasons for bullish views on Bitcoin vary. Over a decade ago, many believed Bitcoin could replace the dollar as a decentralized monetary foundation. Few hold that view today. The new narrative positions Bitcoin as a reserve asset—a “digital gold”—supporting rather than replacing the dollar-based monetary system. In this vision, crypto assets back stablecoins, forming a closed loop and establishing a new monetary architecture for the digital age.
We can examine this from three angles. First, the supposed loop from cryptocurrency to crypto asset does not exist. Stablecoins use digital technology but are economically speaking dollar-pegged private money—extensions of the dollar, a debt-based currency—with no economic linkage to Bitcoin or other crypto assets.
Second, modern money has long evolved from commodity-based forms like gold to credit/debt-based systems—a transition that applies equally to today’s “digital gold.” The core feature of credit money is that its value relies on the issuer’s (typically government or central bank) credibility, tying money intrinsically to debt. Modern economies depend on “credit transactions” (e.g., trade credit, consumer loans, bond markets), requiring money to be transferable and usable for deferred payments. Debt money naturally supports this through creditor-debtor relationships. For example, bank deposits are claims on banks; stablecoins are claims on their issuers—both instantly transferrable.
Keynes famously called the gold standard a “barbarous relic,” criticizing its rigid rules as incompatible with modern economic needs. Under the gold standard, money supply was mechanically tied to gold reserves, depriving policymakers of flexibility to respond to business cycles—often exacerbating economic volatility and contributing to inequality. Keynesian economics paved the way for 20th-century monetary policy to shift from “gold constraint” to “national credit leadership,” enabling countercyclical tools like rate cuts and quantitative easing.
The ultimate backing of credit money is national credit. For the dollar, a key manifestation is that base money—liabilities of the Federal Reserve—is backed by U.S. Treasury securities on the asset side. Bank money (broad money, i.e., deposits) derives its credibility from government guarantees and regulation, including the lender of last resort, deposit insurance, and, in crises, blanket support—making it an extension of government debt. Dollar stablecoins are backed by U.S. Treasuries and other high-grade liquid assets, benefiting from government credit, but lack the explicit regulatory and guarantee mechanisms that ensure convertibility for bank money. At the international level, the dollar’s role as the dominant reserve currency rests on U.S. national credit—underpinned by the world’s largest economy and deepest financial markets.
Third, perhaps governments could enhance their creditworthiness by holding appreciating assets. For small economies with limited internal investment opportunities and low long-term growth potential, holding external assets makes sense—such as Norway and Singapore’s sovereign wealth fund models, or emerging-market central banks holding dollar assets to bolster confidence in their own currencies. But it is hard to imagine a large economy—especially one supplying the world’s reserve currency—deriving credible backing from externally sourced asset values.
More broadly, beyond monetary reserves, could Bitcoin and other crypto assets serve as strategic government investments? Long-term asset returns fall into two categories: cash-flow-driven (stocks, bonds) and price-volatility-driven (gold). The former generates wealth via compounding, linked to economic growth; the latter depends entirely on speculative “buy low, sell high” dynamics.
One argument for government investment in Bitcoin is that it supports innovation in blockchain and cryptography, whose positive spillovers could benefit society—yielding a kind of “compound effect” from innovation. While such positive externalities cannot be dismissed, they must be weighed against negative ones. Bitcoin exhibits diseconomies of scale: equilibrium is achieved only through price increases, crowding out other investments—especially real-economy projects. In this light, strategic government investment in Bitcoin is not clearly superior to investing in equities, stocks, or basic research, and thus lacks inherent necessity.
VI. Policy Implications
Based on the above analysis, three policy implications merit discussion.
First, dollar stablecoins embody a fundamental tension between the public-good nature of payment systems and private profit motives, whose macroeconomic and financial stability implications will inevitably prompt stronger regulation. The current growth model relies on private entities issuing private “money” and profiting from interest spreads. This contradicts the public-good attributes of payment systems—security, stability, inclusiveness. Historically, the public-good nature of bank money was gradually institutionalized through financial regulation and government guarantees. The success of China’s WeChat Pay and Alipay models lies in combining market-driven operation with effective regulation that preserves the public-good character of payment channels. The general pattern—market innovation followed by regulatory reinforcement—should also apply to stablecoins.
Second, from the perspective of international monetary competition, the United States stands to gain the most from the stablecoin mechanism. As privately issued narrow-bank money, dollar stablecoins benefit from the dollar’s incumbent status as a reserve currency—including advantages in financial market depth and scale. The expansion of dollar stablecoins extends the dollar’s global role, and their network effects and regulatory arbitrage may further entrench dollar dominance. For non-U.S. economies, countering dollar stablecoins by developing local-currency stablecoins is not optimal. This is not only because most countries lack comparative advantage in finance, but also because doing so may introduce new complexities and risks—potentially undermining monetary management and capital account controls. This likely explains why the ECB emphasizes developing a digital euro (a CBDC) rather than euro stablecoins to respond to the dollar challenge.
Third, for China, the key strategy is to leverage its strengths in large real-economy scale and vast population (enabling broad application scenarios). It should vigorously promote the use of platform-based digital currencies like WeChat Pay and Alipay in cross-border payments. At the same time, it should harness the exogenous power of central bank digital currency (CBDC) to support the international development of platform currencies, building new, efficient, low-cost cross-border payment infrastructure—including through multilateral CBDC cooperation. Platform-based payment tools inherently possess stablecoin-like features. Compared to dollar stablecoins, they have stronger real-economy foundations, weaker financialization, and already exhibit network effects—constituting China’s comparative advantage.
Of course, stablecoins represent a new payment technology and business model that may generate unforeseen positive spillovers. A complete rejection would not be optimal. Exploring how Hong Kong—leveraging its unique role as an international financial center and the largest offshore RMB market—can serve as a controlled testing ground and regulatory correction field for RMB stablecoins would help balance technological innovation with the preservation of payment system public goods, financial stability, and national monetary sovereignty.
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