Some current discussions about stablecoins are based on a single perspective. To understand the operation and future prospects of stablecoins, a multi-dimensional and multi-perspective examination is necessary. If we hope to promote the healthy development of digital payment systems, we must also focus on the performance and balance of multiple dimensions.
1. The Central Bank Dimension: Preventing Excessive Currency Issuance and High Leverage
Stablecoin issuers aim to minimize costs while maximizing stablecoin issuance and adoption. They may wonder, "Why can central banks print money? Shouldn't I, too?" Today, they can also print money through stablecoins. However, due to a lack of in-depth understanding and sense of responsibility regarding monetary policy, macroeconomic regulation, and the functions of public infrastructure, they may lack sufficient self-discipline, potentially leading to uncontrolled issuance, high leverage, and instability. The stability of stablecoins is not a self-declared fact; a determination mechanism is required. Currently, central banks have at least two concerns. First, there is "excessive money issuance," where issuers issue stablecoins without 100% true reserves, a phenomenon known as over-issuance. Second, there is high leverage, where the post-issuance operation generates a multiplier effect of monetary derivatives. Both the US's GENIUS Act and Hong Kong's Stablecoin Ordinance have addressed this issue, but control remains significantly insufficient. First, the custodian of the issuance reserves should be clearly defined. In practice, there have been numerous cases of custodians failing to fulfill their responsibilities. In 2019, Facebook initially planned to self-custody the Libra issuance reserve assets, which would provide greater autonomy and allow it to retain the income from the custody assets. However, reserve custody must be reliable, held by the central bank or one recognized and regulated by the central bank; otherwise, it is unreliable. Secondly, how can the amplification effect of stablecoin operations be measured and managed? Even if the issuer maintains 100% reserve, the stablecoin will still experience a multiplier effect in subsequent operational processes (such as deposits, loans, collateral, trading, and revaluation), and the potential run volume that needs to be addressed could be several times the amount of the issued reserves. On the surface, relevant regulations appear to prevent amplification, but a deeper look at the laws governing currency issuance and operation reveals that existing rules are far from sufficient to address derivative and amplification. Consider the example of Hong Kong's three commercial institutions issuing Hong Kong dollar banknotes: The issuance mechanism for these three issuing banks is that for every HK$7.8 issued, they must deposit US$1 as a reserve with the Hong Kong Monetary Authority and receive a certificate of liability. Based on the Hong Kong dollar banknote M0, the economic and financial system generates M1 and M2 through derivative and multiplier effects. In the event of a bank run, not only M0 but also M1 or M2 will be targeted. Even if the base currency M0 is fully covered by reserves, it cannot rely on M0 reserves to counter a bank run and maintain monetary stability. The amplification effect of stablecoins has three known typical channels: deposit and loan channels; collateral financing channels; and asset market transactions (which can purchase or revalue additional reserve assets). Therefore, regulators need to count and measure the actual circulation of issued stablecoins; otherwise, the scale of potential redemption risk cannot be accurately determined. The amplification multiplier effect of stablecoins can also provide opportunities for fraud and market manipulation. Second, Financial Service Model Dimension: The Real Demand for Decentralization and Tokenization
Assuming the future ecosystem features large-scale decentralization of financial activities and the widespread tokenization of assets and trading instruments, stablecoins will be highly useful. First, stablecoins are well-suited to the development of decentralized finance (DeFi); second, tokenization is a necessary foundation for DeFi's operations. We need to delve deeper into why and to what extent we will move towards decentralization and tokenization.
From a supply-side perspective, blockchain and distributed ledger technology (DLT) do offer the advantages of decentralized operations. However, from a demand perspective, how much demand is there for decentralization as a new operating system? Will most financial services transition to this new system? A sober assessment reveals that not all financial services are suitable for decentralization, and only a limited number can achieve significant efficiency improvements through decentralization. The true demand for tokenization, the underlying technology, also requires a sober assessment. Looking at the promising upgrades and transformations of payment systems (especially cross-border payments), the retail payment systems in China and several Asian countries have made successful progress in developing mobile-based applications using QR codes and near-field communication (NFC) as merchant interfaces, yet these systems remain account-based. China's current digital currency is also account-based, extending and iteratively updating the existing financial system. Furthermore, some Asian countries have implemented cross-border direct fast payment systems, which have also not chosen a decentralized or tokenized approach. To date, centralized account systems continue to demonstrate good applicability. The argument for replacing account-based payment systems with full tokenization is weak. The Bank for International Settlements (BIS) has proposed a centralized ledger architecture, the Unified Ledger, to tokenize bank deposits and a wide range of other financial services. Within this centralized framework, central bank digital currencies (CBDCs) can play an important role, representing a combination of centralization and tokenization. However, it's important to note that not all financial assets are suitable for tokenization, nor are all financial services suitable for decentralization. Specific analysis and comparison are required. There are two major concerns in the replacement of payment systems: one is payment efficiency, and the other is compliance. Improved payment efficiency is considered one of the potential advantages of stablecoins. In the current process of digitalizing the payment system, there are roughly two paths to improving efficiency. The first is to continue to use accounts as the foundation, optimizing and innovating based on IT and internet technologies. The second is to develop a completely new payment system based on blockchain technology and cryptocurrency. Looking at the current development of payment systems in China and Southeast Asia, the primary progress achieved to date remains based on internet and IT technologies, including the development of third-party payment platforms, progress in central bank digital currencies (CBDCs), NFC-based hardware wallets, and the interconnection of fast payment systems. These advances have significantly improved payment efficiency and convenience. The technological path itself is not the sole criterion; comparisons of payment performance must also prioritize security and compliance, including Know Your Customer (KYC), identity verification, account opening management, anti-money laundering (AML), counter-terrorism financing (CFT), anti-gambling, and anti-drug trafficking regulations. Some believe that since stablecoins are blockchain-based, account opening is unnecessary. This is inaccurate. Even using a "soft wallet" requires user identity verification and an account opening process to meet compliance requirements. Currently, stablecoin payment services still have significant deficiencies in KYC and compliance. Fourth: Market Trading Dimension: Market Manipulation and Investor Protection
From the perspective of financial and asset market transactions, the most pressing issue to guard against is market manipulation, particularly price manipulation. This requires full transparency and effective oversight. In fact, such manipulation already exists, with several cases already occurring. Some of this price manipulation is clearly fraudulent. However, under the improved current institutional framework, whether it's the US Genius Act, relevant regulations in Hong Kong, or regulatory provisions in Singapore, these issues remain reassuring. A new phenomenon is the mixed use of hybrid or multiple currencies: that is, the simultaneous use of multiple currencies for transactions or payments within a single system. Not all of these currencies are truly stablecoins, nor do they necessarily have consistent, recognized stablecoin standards. In current asset markets, particularly on virtual asset exchanges, many transactions are made in stablecoins, other volatile cryptocurrencies, or even completely volatile currencies. This arrangement creates the potential for market manipulation and has become a key regulatory concern. It is noteworthy that some marketers have suggested that technologies such as stablecoins and RWAs can be used to fragment asset transactions into very small portions, thereby enabling wider investor participation. They claim that this model has already attracted a large number of students under the age of 18 to participate in trading. While some believe this will help foster youth participation in the capital market and contribute to its future prosperity, its true beneficial effects from an investor protection perspective remain to be seen. While investors' suitability and qualifications have been emphasized in the past, there is currently insufficient evidence to support the question of whether minors are suitable for asset market transactions. If market manipulation cannot be effectively prevented, and unqualified investors are attracted to the market, the risks will be significantly increased. V. Micro-Behavioral Dimension: Motivations of Various Participants Stablecoin issuers are generally commercial institutions with profit-making objectives. Many entities involved in stablecoin-related payment and asset trading are also commercial, and these institutions inevitably have commercial motives. However, stablecoins and payment systems contain functions or links that possess infrastructure and inclusive benefits. Micro-behavior should not be guided by the logic of maximizing corporate profits, but rather by a spirit of public service. Clear demarcations should be established between areas suitable for market-based entities and those that are infrastructure-based. A micro-perspective is needed to analyze the motivations and behavioral patterns of various stablecoin participants. What are the considerations behind using stablecoins for payments? Why are recipients willing to accept stablecoins? What are the motivations of stablecoin issuers? What kind of trading landscape are private exchanges pursuing? Hong Kong has currently issued licenses to 11 virtual asset trading platforms. What trading entities and products are these licensed institutions focusing on? How do they profit? While many believe stablecoins will reshape the payment system, objectively speaking, the current payment system, especially in the retail payment sector, has little room for cost reduction. In China, the existing retail payment system, including third-party payment platforms, central bank digital currencies (CBDCs), soft and hard wallets, and clearing infrastructure, has not adopted a decentralized and tokenized approach. After years of development, it has become highly efficient and low-cost, leaving little room for new entrants to reduce costs and profit. Looking at the US, there may still be some room for cost reduction and profit in the retail payment system. This is because the US has long relied on the credit card payment system, and merchants typically bear a 2% price discount, which creates an incentive to explore new, lower-cost payment systems. This also illustrates that from the perspectives of payers and payees, the situation varies across countries and regions. Cross-border payments and remittances are often mentioned as key areas when discussing stablecoin applications. To delve deeper into this issue, we first need to analyze the reasons for the current high costs of cross-border payments, specifically identifying the specific links that contribute to these high fees. It's important to note that some claims that traditional cross-border payment systems are technically "very expensive" may be exaggerated. In reality, many of these costs are not technical, but rather relate to foreign exchange controls, which are linked to numerous institutional issues such as the balance of payments, exchange rates, and monetary sovereignty. Another portion of the cost comes from compliance costs such as Know Your Customer (KYC) and Anti-Money Laundering (AML), which are also unavoidable when switching to stablecoins. Furthermore, some costs arise from the "rent" of cross-border foreign exchange business as a franchise. In short, the appeal of stablecoins in cross-border payments is not as great as one might imagine. Of course, this applies to scenarios where domestic currencies are failing and dollarization is necessary. From the perspective of stablecoin issuers, if they find that domestic and cross-border payments are lacking in appeal, the most likely focus will be on asset market transactions, particularly virtual asset trading. Certain assets in this market are highly speculative and prone to price inflation, making them attractive for stablecoin issuance. Furthermore, some virtual assets can serve as qualified or semi-qualified stablecoin issuance platforms. Current micro-behavior suggests caution regarding the risk of stablecoins being excessively used for asset speculation. A misalignment could lead to fraud and financial system instability. Furthermore, the use of stablecoin-related businesses to boost their own valuations is also a concerning practice. Some companies may leverage the popularity of stablecoins to raise funds through the capital markets or realize capital appreciation before cashing out. The stablecoin business itself, its profitability, and its sustainability are not their primary focus. This is detrimental to the healthy development of the entire financial system and could potentially accumulate systemic risks. Six. Circulation PathPathDimension: Circulation Mechanism from Issuance to Recovery
The circulation path of stablecoins involves the entire cycle from issuance to market circulation and recovery in specific scenarios. Taking the People's Bank of China's banknote issuance as an example, printed banknotes are first stored in a designated issuance vault. Whether and when these banknotes enter the market depends on whether commercial banks have cash demand. Commercial banks only withdraw cash from the People's Bank of China's issuance vault when their clients have net demand or when there is a loan-to-value gap. This withdrawal incurs a cost for the commercial banks, so they withdraw banknotes when their inventory is high. This demonstrates that the entry of currency into circulation is not automatic. Similarly, obtaining the relevant licenses and paying reserve requirements for stablecoin issuers does not guarantee the issuance of the stablecoin. Without sufficient demand, a stablecoin may not enter effective circulation. In other words, it is possible to obtain an issuance license but remain unable to issue the stablecoin. In theory, circulation channels should be network-like, often with several main routes carrying significant traffic. If this main route for payment is blocked, the primary channel for stablecoin circulation will rely excessively on speculation in virtual assets, raising concerns about its health. Furthermore, whether a stablecoin is used as a temporary payment medium during transactions or as a tool to preserve value over a certain period of time will affect its remaining volume in the market after issuance. If stablecoins are used solely for transactions and held as little as possible, their role will be weak and their issuance will be small. This raises questions about the distribution channels, the motivations and behaviors of holders, and the supporting systems. This isn't something that can be automatically granted by an issuing license. In short, facing the new concept of stablecoins, scholars, researchers, and practitioners need to observe and analyze their functions and implementation paths from multiple perspectives, avoiding loose concepts, data, and one-sided thinking. Only by comprehensively evaluating these key dimensions can we better understand market trends.
Note:This article is based on part of the speech delivered by Zhou Xiaochuan, former Governor of the People's Bank of China, at the CF40 biweekly closed-door seminar on "Opportunities and Prospects for RMB Internationalization" on July 13, 2025. The main content is derived from his speech at the International Capital Market Association (ICMA) Annual Meeting in Frankfurt on June 5, 2025, with slight adjustments.
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