How can stablecoins reshape our financial world?
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How can stablecoins reshape our financial world?
稳定币代表了数字金融发展的前沿方向，它既带来前所未有的挑战，也蕴含着重要机遇。
Navigating Web3 tides with focused insightsAuthor: Deng Jianpeng, Professor at the Law School of Central University of Finance and Economics, expert in blockchain law
1. The Quiet Revolution in Digital Currency
Imagine a "digital dollar" that holds nearly the same value as one U.S. dollar in the digital world, enabling fast global transfers at just one-tenth the cost of traditional cross-border payments. This is stablecoin—one of the most revolutionary financial innovations of our time, and also one of the most controversial forms of cryptocurrency.
Since its inception in 2014, the stablecoin market has grown from zero to nearly $320 billion—equivalent to the annual GDP of an advanced economy like Switzerland. Even more astonishing is Tether Limited, the company issuing USDT, which achieved $13.7 billion in annual net profit with fewer than 200 employees—nearly $100 million in profit per employee, making it dozens of times more efficient than traditional financial giants.
This digital financial revolution is transforming our payment methods, investment habits, and even challenging the foundations of the traditional financial system at an unprecedented pace. Let’s take a closer look at all aspects of stablecoins and see how they affect our wallets—and where they might lead the world.
2. Stablecoins: The "Hard Currency" of the Digital World
What Are Stablecoins?
In simple terms, stablecoins are cryptocurrencies designed to maintain a 1:1 exchange rate with a fiat currency—primarily the U.S. dollar. However, this “stability” is relative. Take the most common examples, Tether (USDT) or USDC: under normal circumstances, people can treat them as equivalent to one U.S. dollar when trading on secondary markets or making offline purchases. Yet their price may slightly exceed $1, and in extreme cases fall below $1—or even become worthless.
Technical Foundation: A Global Ledger on Blockchain
Stablecoin tokens operate on public blockchains, where transactions are recorded on a shared ledger. This ledger could be Ethereum, Bitcoin, Solana, or others. Blockchain is essentially a globally unified ledger; peer-to-peer transactions require no intermediaries and settle as quickly as sending an email.
But this convenience comes at a cost: if you send the wrong amount or send funds to the wrong address, there is generally no way to recover them due to the absence of third-party intermediaries. It's like putting cash into the wrong pocket—once it leaves your hands, it's nearly impossible to retrieve.
Market Status: The Dominance of Dollar-Backed Stablecoins
When we talk about stablecoins, we’re mostly referring to dollar-backed stablecoins. Since the emergence of Tether in 2014, fiat-collateralized stablecoins have become mainstream, accounting for 95% of total stablecoin market capitalization. On August 23, 2025, the total stablecoin market cap reached over $260 billion, surpassing $310 billion by early November—an impressively rapid growth trajectory.
In terms of market distribution, USDT and USDC together account for over 80%, making them focal points for academic research and regulatory scrutiny. Although stablecoins had relatively small market caps six or seven years ago, their turnover rates were extremely high—reaching up to 500% daily in 2019, with monthly transaction volumes exceeding $3 trillion, far exceeding their market size in influence.
Remarkable Profitability
Circle, the issuer of USDC, represents compliant stablecoin issuers, with a stablecoin market cap of around $70 billion. After going public in June, its stock price surged tenfold within a month, creating a sensation in the investment community.
Even more striking is Tether’s profitability. With fewer than 200 employees, the company earned $13.7 billion in net profit last year—nearly $100 million in profit per employee. By comparison, international credit card giant VISA employs 30,000 people and earned $19.7 billion in net profit last year. The profitability and market appeal of stablecoins are evident.
Three Core Characteristics of Stablecoins
1. Centralized Issuance and Decentralized Circulation
Unlike central bank digital currencies (CBDCs), stablecoins are issued by private entities without direct state backing. For example, Tether leverages public blockchain ledgers to achieve decentralized asset circulation, allowing its tokens to flow freely across globally integrated blockchain networks such as Bitcoin, Ethereum, Polkadot, and Solana. This borderless, cross-jurisdictional circulation model breaks through geographical and legal boundaries, posing new challenges to traditional financial regulation.
2. Highly Efficient Payment and Settlement System
Compared to traditional payments, stablecoins eliminate intermediaries, enabling the shortest possible payment path with instant settlement—combining payment, clearing, and settlement in one step. Cross-border fees are about one-tenth of traditional systems or lower, giving stablecoins a clear advantage in cross-border payments. For the roughly 900 million to 1 billion unbanked individuals worldwide, stablecoins offer high financial inclusivity: all one needs is a smartphone and internet access to download a crypto wallet and participate in global payments—no bank account required.
3. Innovative Issuance and Redemption Mechanism
The issuance process works as follows: authorized participants (such as large institutions) apply to Tether to issue 100 million stablecoins. Upon approval, they deposit $100 million into Tether’s bank account. For every dollar received, Tether issues 100 million USDT to the institution’s crypto wallet. Of the incoming funds, 10%-20% is held as a dollar reserve to meet redemption demands, while the remaining 70%-80% is primarily invested in highly liquid, low-risk instruments such as U.S. Treasury bills maturing within 93 days (yielding an annualized return of 4.25%). Through this business model, Tether achieves nearly risk-free profits.
The redemption process is reversed: authorized participants send Tether tokens to a designated wallet; Tether sells U.S. Treasuries to obtain cash, pays the participant, and simultaneously burns the corresponding amount of USDT. This mechanism ensures dynamic balance between stablecoin supply and reserve assets.
Future Outlook: Convergence of Stablecoins and Artificial Intelligence
The integration of stablecoins and artificial intelligence holds broad promise and significant research value. Currently, AI applications in finance are limited because AI agents cannot independently open accounts or hold cash, preventing them from completing payments—restricting their roles to basic functions like smart customer service and robo-advisory.
Blockchain’s pseudo-anonymity (no identity verification required) and decentralization precisely fill this gap, enabling AI agents to conduct autonomous payments via cryptocurrency wallets. This convergence will fundamentally reshape real-world economic rules: for instance, AI agents could autonomously plan travel itineraries, book flights and hotels, or incentivize users to create content through stablecoin-based tipping mechanisms—enabling seamless 24/7 transactions.
Compared to traditional finance, constrained by legal frameworks, blockchain has already seen numerous practices involving autonomous token issuance and smart tipping. This fusion may not only reshape rights and obligations in finance but also spawn entirely new transaction models, offering valuable academic breakthroughs for future financial research.
3. Four Major Risks and Challenges of Stablecoins
Based on reports from renowned international financial organizations such as the Bank for International Settlements (BIS) and the Financial Stability Board (FSB), along with industry observations, we can summarize four primary risks and challenges associated with stablecoins:
(1) Risk of Illegal Activities and Regulatory Evasion
Criminals involved in telecom fraud, drug trafficking, and organ trade frequently use stablecoins to launder illicit proceeds. Stablecoins offer a degree of anonymity and pseudonymity, require no identity verification, and operate outside traditional financial rules.
To enhance anonymity, criminals often use mixing tools—for example, Tornado Cash, a mixer sanctioned by the U.S., can completely obscure identities, and North Korean hackers have used similar tools to evade tracking. Crucially, stablecoins’ peer-to-peer transactions via non-custodial wallets bypass regulated third parties, rendering traditional anti-money laundering (AML) and counter-terrorism financing (CFT) systems ineffective. This significantly undermines financial regulation and creates a "gray channel" for illegal cross-border fund flows.
(2) Challenge to Monetary Sovereignty and Monetary Policy
The widespread cross-border use of dollar-backed stablecoins infringes on other countries’ monetary sovereignty. In high-inflation countries like Zimbabwe and Turkey—where inflation reaches 70% or even 200% annually—rational individuals naturally prefer converting local currency into dollar stablecoins. This rational choice directly reduces demand for domestic currencies, creating substitution effects that undermine national fiat currencies and challenge foreign exchange controls and other monetary sovereignty measures.
Traditional regulatory tools are nearly powerless against this unless extreme measures like internet shutdowns are taken. Otherwise, capital outflows via stablecoin channels are hard to stop. This poses a fundamental challenge to nations’ ability to maintain monetary stability and implement independent monetary policies.
(3) Financial Stability and Systemic Risk
Stablecoin issuers, seeking maximum profit, may invest in high-risk assets, creating major vulnerabilities. In the early days, some issuers used dollar reserves to buy Bitcoin, which was extremely volatile between 2015 and 2021, often swinging 30%-70% in a single day.
Under U.S. regulations, stablecoin reserves held in banks lack federal deposit insurance, posing potential risks. Stablecoins have repeatedly experienced de-pegging events—for example, the algorithmic stablecoin LUNA collapsed from a 1:1 parity with the dollar to $0.14, ultimately wiping out its $50 billion market cap and leaving many investors bankrupt. Historical evidence shows that stablecoins lacking effective regulation and real-world asset backing carry enormous risks.
(4) Cross-Border Regulatory Coordination and Compliance Dilemmas
The seamless global circulation of stablecoins via public blockchains creates fundamental challenges for cross-border regulation and compliance: countries have vastly different regulatory stances. China bans them outright, the U.S. allows limited use, Hong Kong requires licensing, while other jurisdictions adopt laissez-faire approaches.
The decentralized architecture of public blockchains enables issuers to inherently operate beyond any single jurisdiction, directly conflicting with national financial regulations. While powerful regulators like the U.S. can enforce compliance abroad through long-arm jurisdiction (e.g., FinCEN under the U.S. Treasury), weaker nations lack enforcement capacity, allowing issuers to circumvent rules in those regions.
This makes it difficult to enforce consistent principles across borders, leading to regulatory arbitrage. When courts worldwide frequently request asset freezes related to crimes like telecom fraud and drug trafficking, issuers (like Tether) inevitably engage in selective judicial assistance—prioritizing powerful countries like the U.S. while ignoring weaker nations—resulting in a compliance deadlock where “the strong dominate and the weak are left helpless” in cross-border AML cooperation.
4. The U.S. Stablecoin Regulatory Framework and Its Global Impact
The U.S. GENIUS Act passed in July this year presents a notable regulatory framework for stablecoins, particularly worth analyzing for its implications on dollar-backed stablecoins and their global impact.
Core Elements of the Regulatory Framework
In terms of reserve requirements, the bill mandates that issuers either hold 100% dollar reserves or invest solely in U.S. Treasury bills maturing within 93 days—highly liquid, low-risk, and profitable. Issuers must choose between cash and U.S. Treasuries, with no other reserve options allowed.
On regulatory tiers: entities issuing over $10 billion are supervised by the Federal Reserve, Treasury Department, and Office of the Comptroller of the Currency; smaller issuers fall under state oversight. For example, USDC’s issuer is federally regulated. This “focus on the big, leave the small” model offers reference value for China’s future regulatory legislation.
Transparency and Compliance Requirements
The act prohibits misleading marketing, requires adherence to AML and Know Your Customer (KYC) rules, and mandates annual financial audits to ensure transparency. Previously, Tether operated like an “aircraft carrier” in this space—growing to a $170 billion market cap since 2014—but remained largely unregulated for nearly a decade.
It claimed every USDT was backed by one dollar in reserves, yet faced persistent skepticism. While early independent audits confirmed sufficient reserves, no auditor dared to verify them for the next seven or eight years. At one point, its dollar reserves were held in banks in obscure Central American countries, causing anxiety among stablecoin holders who feared a Tether collapse could trigger a Bitcoin crash. Thus, transparency requirements are crucial—the U.S. rule has reshaped industry standards.
Anti-Money Laundering Responsibility and RegTech
The GENIUS Act designates issuers as the “first responsible party” for AML and combating illicit financial activities, requiring them to possess technical capabilities to respond immediately when the FBI requests freezing of suspicious Tether tokens. Meanwhile, the U.S. Treasury’s FinCEN is tasked with developing detailed rules and new tools to monitor Tether’s encrypted activities and review compliance programs.
Strategic Intent and Global Influence
The act is highly significant and favorable to the broader crypto sector, but its strategic intent warrants caution from global financial regulators. On one hand, it sets industry rules and reshapes global standards; on the other, it solidifies the linkage between stablecoins, the U.S. dollar, and U.S. Treasuries, creating a perfect closed loop. It encourages, promotes, or even compels issuers to become major buyers of U.S. Treasuries, reinforcing the dollar’s dominance in the international monetary system, increasing global acceptance and demand for dollar digitization, and further consolidating U.S. financial hegemony.
Potential Issues and Regulatory Gaps
The U.S. framework still has shortcomings. First, reserves lack federal insurance—posing risks during extreme events. For example, Circle once held about $3 billion in reserves at Silicon Valley Bank, which encountered difficulties, causing its stablecoin USDC to drop from a 1:1 peg to $0.8.
Second, critical aspects of stablecoin safety remain unaddressed in current legislation—such as verifiable reserve transparency, redemption commitments, pre-tested orderly resolution procedures, and risk management processes.
Third, real-time reporting on redemptions and liquidity, daily net asset value disclosures, and third-party transparent audits—though essential—are not fully reflected in U.S., Hong Kong, or EU MiCA regulations. These are key areas for future financial regulatory research.
Additionally, dollar-backed stablecoins pose significant privacy risks: transaction records on public blockchains are permanently stored and publicly viewable, potentially exposing users’ personal and commercial secrets. How future regulations can protect user privacy remains an urgent question.
5. Digital Currency Sovereignty Competition and the Impact of Stablecoins
U.S.-China Financial Competition Context
In recent years, intense financial competition between the U.S. and China has profoundly affected dollar-backed stablecoins. Since 2017, financial security tensions between the two nations have escalated. After the 2022 Russia-Ukraine war, the U.S. and EU imposed over 6,000 sanctions on Russia—including removal from SWIFT—sparking widespread concern among other countries about financial sanctions.
As a major economic and financial power, China must consider countermeasures—de-dollarization, launching a central bank digital currency (CBDC), or collaborating with Belt and Road countries on digital currency bridges. However, these solutions face various limitations. In this context, stablecoins may represent another strategic opportunity for China.
A New Pillar of Dollar Hegemony
The dollar has weakened somewhat in the past two years, and U.S. Treasuries have become less attractive. Some financial experts argue that U.S. financial dominance is declining and global financial power is shifting. Yet the U.S. GENIUS Act-driven dollar stablecoin may present a new opportunity—even reversing this trend.
Dollar stablecoins are growing rapidly. Their issuers have become major buyers of U.S. Treasuries—holding $128 billion in the past 12 months, ranking among the top 20 holders globally, surpassing sovereign nations like Germany and Saudi Arabia. A Citibank report projects that stablecoin holdings of U.S. Treasuries could surge to $3.7 trillion by 2030—if so, they would rank first globally—potentially reversing the decline of dollar hegemony.
Among all stablecoin types, dollar-backed ones are expected to remain the most popular over the next decade. Citizens in countries with weak currencies will increasingly favor stronger currencies, accelerating the marginalization of weaker fiat currencies—and possibly affecting the internationalization of the RMB.
A New Mechanism of Money Creation
Stablecoin issuers also raise concerns about money creation. While the BIS’s 2025 report argues stablecoins lack elasticity, in practice, issuers engage in credit expansion. Consider Tether: suppose an authorized participant deposits $1 million in cash (akin to M1). The issuer keeps a small portion in bank deposits and invests the rest—say, in U.S. Treasuries or even gold—while issuing 1 million USDT to the participant. These USDT tokens resemble M2.
USDT is essentially a liability note issued by Tether to holders. But once received, holders can use it for payments—effectively functioning as money (similar to M1). This amounts to creating money out of thin air, implying money creation. The multiplier effect of this credit expansion can inflate asset prices in certain sectors, causing inflation in niche areas like crypto assets, challenging central banks’ monopoly on money creation. Current regulations give little thought to this, warranting deeper financial analysis. In early crypto markets, this issue was severe—some suspected Tether was behind Bitcoin price volatility.
Bridging Two Financial Worlds
Driven by compliance, the GENIUS Act defines stablecoins as payment instruments rather than securities, prohibits interest payments to issuers, and grants them M1-like monetary status. Dollar stablecoins bridge the fiat and crypto worlds, providing digital payment and settlement media for exchanges, decentralized finance (DeFi), and non-fungible token (NFT) ecosystems—connecting crypto finance with traditional finance and reshaping both domains.
In cross-border payments, stablecoins offer high efficiency and low cost. Offline, they are increasingly integrated with Mastercard and Visa—users can load USDT onto Visa cards, link them to WeChat Pay or Apple Pay, and spend at roadside barbecue stalls, though fees remain high. This trend merges blockchain finance with traditional finance, challenging existing regulatory frameworks.
6. Challenges to China’s Financial Security and Policy Reconsideration
Specific Challenges Facing China
Stablecoins pose multiple threats to China’s financial security. One major risk is the potential marginalization of China’s dominant payment systems and replacement of the RMB. While China does not suffer hyperinflation like Argentina, dollar stablecoins leverage blockchain technology to build efficient cross-border payment networks. International vendors can directly accept dollar stablecoins, bypassing China’s foreign exchange controls and traditional payment systems—preventing SAFE from tracking foreign capital flows and threatening monetary sovereignty and financial security.
Meanwhile, stablecoins partnering with compliant credit card networks to build global payment channels disrupt the regulation of China’s existing third-party payment systems. Moreover, in cross-border payments, stablecoins may circumvent traditional systems—including China’s CIPS and multi-currency bridge initiatives built at great effort.
In addition, stablecoins’ peer-to-peer cross-border payments via blockchain may challenge China’s “trilemma” in financial control—simultaneously undermining free capital flow, independent monetary policy, and exchange rate management.
Investors may sell local currency and hoard dollar stablecoins, weakening RMB demand—especially when dollar-denominated wealth products yield 4%-5% and RMB depreciation expectations exist. Cryptocurrency market volatility exacerbates this: when Bitcoin prices surge, investors rush to convert RMB into stablecoins, amplifying capital outflows. This high-yield, automated settlement feature not only challenges traditional banking settlement but also threatens exchange rate stability through capital flight, rendering conventional capital controls ineffective.
Reflections on China’s Regulatory Policies
In 2021, the PBOC and other agencies issued the “Notice on Further Preventing and Managing Risks of Virtual Currency Trading Speculation,” strictly banning virtual currency trading. At the time, curbing speculative risks was beneficial, but in the long run, it created a regulatory vacuum.
In civil law, it fails to protect legitimate stablecoin holders; in public law, it cannot effectively address money laundering, terrorist financing, or capital flight linked to dollar stablecoins. Moreover, central bank regulations have unintended ripple effects: after the September 4, 2017 regulatory crackdown, direct fiat-to-Bitcoin trading channels on exchanges were severed. Investors turned instead to trading Bitcoin against stablecoins, causing stablecoin usage to skyrocket and shifting Bitcoin pricing from RMB to USD—a result regulators did not anticipate.
An ancient saying goes: “Institutions must be carefully examined, governance laws cautiously considered, and state affairs prudently handled.” Financial regulation must be thoroughly thought through to avoid unintended consequences from campaign-style enforcement.
China’s Response Strategies
First, adjust regulatory philosophy—from suppressive regulation toward collaborative governance. Collaborative governance means regulators do not make unilateral decisions. Policies like “blockchain without tokens” are questionable. Instead, bring together key stakeholders—issuers, authorized participants, crypto wallet providers, and platforms—to jointly develop regulatory rules and strike a balance between innovation and risk prevention. Hong Kong’s current rules are overly strict, likely dimming prospects for locally issued stablecoins. Initial regulations should be more flexible and moderate.
Second, build monetary firewalls and strengthen financial anti-sanction capabilities. China could gradually open stablecoin access in stages, using Hong Kong as a pilot zone to gain experience and shape future national regulations. Pursue multilateral stablecoin cooperation, prioritizing offshore RMB-pegged stablecoins before advancing onshore versions—aligning with RMB internationalization.
At the international level, work with BIS, IMF, and others to shape global rules and increase China’s voice. Domestically, enhance regtech—using AI to detect suspicious transactions. Expanding use cases for RMB-pegged stablecoins is crucial: through RWA (real-world assets), AntChain has already successfully issued several such tokens in Hong Kong. Future on-chain transactions could directly use RMB stablecoins, opening new development space for RMB-pegged digital currencies.
Conclusion: Seizing Opportunities Amid Challenges
Stablecoins represent the frontier of digital finance—bringing unprecedented challenges alongside significant opportunities. For China, the key lies in managing risks without missing the wave of digital financial innovation.
Against the backdrop of dollar stablecoins accelerating global expansion under the GENIUS Act, China’s response must be smarter and more flexible. On one hand, safeguard financial security and monetary sovereignty; on the other, actively participate in this digital financial revolution and seek new breakthroughs for RMB internationalization in the era of digital currency.
Future financial competition will not only be about currencies—it will be about rules and standards in digital finance. China must raise its voice in this contest and establish a regulatory framework aligned with its own interests and global trends to secure a favorable position in the new era of digital finance.
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