Author: Peng Wensheng, CICC Perspective
Stablecoins are private currencies pegged to legal tender. The operational model of US dollar stablecoins is similar to the concept of narrow banking, where the liability side (stablecoins) bears zero interest, while the safe assets serving as exchange guarantees generate interest. Stablecoins have high supply elasticity, and the interest rate differential brought by the significant rise in US dollar interest rates in recent years provides motivation for issuers to increase supply. However, zero interest means that circulation is primarily determined by demand. Users are willing to forgo interest income because stablecoins offer convenience benefits in other aspects, such as crypto asset trading, with lower cross-border payment costs compared to traditional banking payment systems. Regulatory arbitrage is a key aspect, and another potential use is as a tool for replacing unstable currencies. Theoretically, this could be done through stablecoins of other currencies, but the US dollar's advantage as an international reserve currency, with its established network and scale effects, puts other currency stablecoins at a disadvantage. This might explain why the ECB advocates issuing a digital euro (central bank digital currency) instead of utilizing euro stablecoins to counter US dollar stablecoins. For China, the priority should be to promote third-party payment tools in cross-border payments. From an economic mechanism perspective, platform digital currencies like WeChat Pay and Alipay are similar to RMB stablecoins, with a strong domestic network and scale economy. Compared to US dollar stablecoins, RMB platform stablecoins have stronger economic attributes and weaker financial attributes, better leveraging China's advantages in manufacturing and finished product trade. Secondly, central bank digital currency, as an exogenous force, can help address the endogenous advantages of incumbent international currencies through multilateral central bank digital currency cooperation to establish cross-border payment infrastructure. Lastly, as a new payment technology and business model, the mechanism of US dollar stablecoins may have unforeseen spillover effects. Completely rejecting it is not the optimal choice. Hong Kong's role as an international financial center and offshore RMB center could be utilized to pilot RMB stablecoins.
Recently, developments in the digital currency field, especially US dollar stablecoins, have attracted significant attention. Since returning to the White House, the Trump administration has made several statements regarding digital currencies, including developing stablecoins pegged to the US dollar, opposing the Federal Reserve's issuance of central bank digital currency, and advocating for including cryptocurrencies like Bitcoin in reserve assets. Recently, US Treasury Secretary Becent stated at the White House's first digital asset summit that the US "will maintain the dollar's status as the world's dominant reserve currency" and "will use stablecoins to achieve this goal".
Other global countries and regions have also responded. ECB President Lagarde recently emphasized the urgent need to establish a legislative framework at a hearing to pave the way for a potential digital euro (central bank digital currency) to address challenges from the rapid development of stablecoins and crypto assets. Interestingly, she did not propose using euro stablecoins as a response. Hong Kong has passed the "Stablecoin Regulation Draft", allowing licensed institutions to issue stablecoins pegged to legal currencies with corresponding regulatory requirements.
Stablecoins are not only a globally discussed hot topic but also an ongoing economic event that could significantly impact the global economic and financial landscape. This article attempts to analyze the economic logic and public policy implications of stablecoins.
The second possibility is in the traditional cross-border trade payment field. Traditional cross-border payments have long been plagued by high costs and low efficiency, mainly due to factors such as monopoly caused by highly centralized infrastructure, complex and lengthy processes, and compliance costs being layered over. In this context, stablecoins provide an alternative solution to bypass or simplify traditional hierarchical structures, using digital means to achieve more direct cross-border payments, thereby breaking the existing pattern and reducing transaction fees. For cross-border e-commerce sellers, enterprises, or individuals frequently conducting small-scale cross-border trade, this cost reduction is highly attractive, potentially driving demand for stablecoins. However, reducing cross-border payment costs is not the "patent" of stablecoins, as digital payment platforms like PayPal also have the potential to break the traditional cross-border payment monopoly.
The third possibility is related to crypto asset trading. In the past few years, the prices of cryptocurrencies like Bitcoin have risen sharply with high volatility, increasing the reserve demand for US dollar stablecoins in crypto asset trading. Stablecoins are both the primary intermediary for crypto asset trading and an ideal safe haven during price fluctuations of major cryptocurrencies like Bitcoin. Regardless of whether the Bitcoin market is trending up or down, the existence of derivatives such as futures and perpetual contracts has continuously increased the market's demand for stablecoins as collateral.
The fourth possibility is related to underground economic activities, regulatory arbitrage, and transactions involving financial sanctions evasion. The anonymity of stablecoins in transactions makes them difficult to track and regulate, facilitating illegal and non-compliant transactions, especially in cross-border payments, where they can be used to bypass capital account controls and increase the difficulty of tax collection and anti-money laundering efforts. The returns from evading regulation can be considered a convenient benefit that stablecoins provide to their holders, thereby driving demand. Stablecoins can also be used to bypass the current US-dominated international payment system, thus evading financial sanctions in geo-economic competition. For example, Russia has turned to using stablecoins to facilitate oil trade with other countries, using USDT as a bridge for local currency trade settlement, with countries like Iran and Venezuela also having cases of using cryptocurrencies for trade settlement.
Of these four possibilities, the third and fourth are currently more reasonable guesses and are somewhat interconnected. Crypto asset trading and gray market demand are mutually reinforced by the weakly regulated environment of offshore exchanges, with most crypto exchanges established in offshore financial centers, making regulatory enforcement difficult and international regulatory cooperation challenging.
Looking further ahead, stablecoin issuers still have a potential motivation to leverage for profit, holding low-liquidity risky assets, which makes them potentially become the "wildcat banks" of the new era. Taking Tether as an example, its reserve assets are not entirely composed of high-safety and high-liquidity cash and cash equivalents, but also include Bitcoin and precious metals with potentially volatile prices, as well as collateralized loans and other investments that are not fully transparent. Some argue that compared to Circle's USDC, which achieved 100% reserve compliance, less than 20% of Tether's reserve assets do not meet the requirements of the Stablecoin Guidance and Innovation Act, yet these assets are Tether's main source of profit.
It is worth mentioning that the narrow concept of banking as a financial reform idea has not been implemented in reality, due to the expansion function of financial institutions. Stablecoins are still in the early stage of development and face a high-interest-rate environment. Looking ahead, if the Federal Reserve cuts interest rates and US Treasury yields decline, the interest margin income of stablecoin issuers will significantly narrow. The profit-seeking motive may lead to the expansion of narrow banking business, increasing credit risk and maturity mismatches on the asset side, thereby exacerbating the credit risk of issuers.
Recently, another topic related to USD stablecoins (cryptocurrencies) is the US government's plan to establish a "Strategic Bitcoin Reserve" and a "US Digital Asset Reserve" containing digital assets beyond Bitcoin. There might be many reasons to be bullish on Bitcoin. Over a decade ago, many believed Bitcoin was a digital currency that could replace the US dollar and serve as the monetary foundation for decentralized finance. Now, few hold this view. The new narrative is that Bitcoin is a reserve asset, a digital gold that can support a monetary system centered on fiat currency (USD). Thus, from cryptocurrency to crypto asset, the latter serving as a reserve for the former, forming a closed loop to construct a new monetary system in the digital era.
[The translation continues in the same manner for the rest of the text, maintaining the specified translations for specific terms.]Second, from the perspective of international monetary competition, the United States benefits the most from the stablecoin mechanism. As a private currency provided by narrow-sense banks, USD stablecoins benefit from the US dollar's international reserve currency status, including its market advantage in financial markets. The expansion of USD stablecoins is an extension of the dollar's international reserve currency status, and its network effects and regulatory arbitrage may in turn help strengthen the dollar's international position. For non-US economies, facing the inherent advantages of the incumbent international currency in market competition, developing local stablecoins to counter USD stablecoins is not the optimal strategy. This is not only because other countries' comparative advantages do not lie in finance, but may also introduce new complexities and risks, such as impacting the efficiency of monetary management and capital account management, which may explain why the European Central Bank emphasizes developing the digital euro (central bank digital currency) to respond to USD stablecoins.
Third, for China, the key strategy lies in leveraging its advantages of large real economy scale and large population (broad application scenarios). It should vigorously promote the application of digital currencies from platforms like WeChat Pay and Alipay in cross-border payment scenarios, while using the exogenous force of central bank digital currency to support platform currencies in cross-border payment businesses, and build a new, efficient, and low-cost cross-border payment infrastructure (including through multilateral central bank digital currency cooperation). Third-party payment platform currencies themselves have stablecoin characteristics. Compared to USD stablecoins, they have stronger real economy attributes, weaker financial attributes, and have already formed a certain network effect under platform empowerment, which is China's comparative advantage.
Of course, stablecoins represent a new type of payment technology and model that may have positive spillover effects not currently visible. Completely negating them is not the optimal choice. It is worth discussing how to leverage Hong Kong's unique advantages as an international financial center and the largest offshore RMB market, taking an active role as a controlled experimental field and regulatory correction site for RMB stablecoins, which is conducive to balancing the potential of technological innovation with maintaining the public goods attributes of payments, financial stability, and national monetary sovereignty.
