Researcher: Peng Wensheng, CICC
introduction
Stablecoins are private currencies anchored to fiat currencies. The operating model of the US dollar stablecoin is similar to the concept of narrow banking. The issuer's liability side (stablecoin) pays zero interest, while the safe assets used as exchange guarantees earn interest. The supply elasticity of stablecoins is large. The interest rate spread brought about by the sharp rise in US dollar interest rates in recent years has given issuers the motivation to increase supply, but zero interest means that its circulation is mainly determined by demand. The reason why demanders are willing to give up interest income is because stablecoins bring other convenient benefits, such as being used for crypto asset transactions, and the cost of cross-border payments is lower than that of traditional bank payment systems. Regulatory arbitrage is an important aspect, and another possibility is that it is used as a tool to replace unstable currencies.
Theoretically, these can also be done through stablecoins of other currencies, but the US dollar has the advantage of being an international reserve currency. Its established network and scale effects put other currency stablecoins at a disadvantage in the competition with the US dollar stablecoin. This may be why the ECB advocates responding to the challenge of the US dollar stablecoin by issuing a digital euro (central bank digital currency) rather than using the euro stablecoin.
For China, the first thing is to vigorously promote the use of third-party payment tools in cross-border payments. From the perspective of economic mechanism, platform digital currencies such as WeChat Pay and Alipay are similar to RMB stablecoins, and have formed a strong network and economies of scale locally. Moreover, compared with the US dollar stablecoin, the RMB platform stablecoin has stronger economic attributes and weaker financial attributes, and can better leverage China's scale advantages in manufacturing and finished product trade.
Secondly, as an exogenous force, central bank digital currency is conducive to coping with the inherent advantages of incumbent international currencies in market competition, such as establishing cross-border payment infrastructure through multilateral central bank digital currency cooperation.
Thirdly, as a new payment technology and business model, the mechanism of the US dollar stablecoin may have spillover effects that are not yet clear. Completely denying it is not the best option. We can give full play to Hong Kong's role as an international financial center and offshore RMB center and pilot the RMB stablecoin in Hong Kong.
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Recently, the development of digital currencies, especially the development of stablecoins, has attracted much attention. Since returning to the White House, the Trump administration has made many statements on digital currencies, including developing stablecoins pegged to the US dollar, opposing the Federal Reserve's issuance of central bank digital currencies, and advocating the inclusion of crypto assets such as Bitcoin in reserve assets. Recently, US Treasury Secretary Benson said at the first White House Digital Asset 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 around the world have also responded. European Central Bank President Christine Lagarde recently stressed at a hearing that a legislative framework should be quickly established to pave the way for the possible introduction of a digital euro (central bank digital currency) to address the challenges brought about by the rapid development of stablecoins and crypto assets, but interestingly, she did not propose using a euro stablecoin as a response [2]. Hong Kong, China, passed the Stablecoin Bill, which allows licensed institutions to issue stablecoins pegged to fiat currencies and sets relevant regulatory requirements [3].
Stablecoins are not only a hot topic of global concern, but also an economic event that is actually happening, which may have a significant impact on the global economic and financial landscape. This article attempts to analyze how to understand the economic logic of stablecoins and their public policy implications.
1. What is a stablecoin? What is it not?
Stablecoins are a type of cryptocurrencies that are pegged to specific assets and are designed to maintain a relatively stable value[4]. Currently, the market value of USD stablecoins (such as USDT and USDC) that are collateralized by highly liquid assets accounts for more than 90% of the total market value of all stablecoins[5]. The stablecoins discussed in this article refer only to such USD stablecoins. Stablecoin transactions can be divided into primary and secondary markets. In the primary market, stablecoin issuers usually promise to redeem 1 USD for 1 stablecoin, but there is a high threshold for participation. Generally, only institutional users can participate, and they must meet the customer identity verification (KYC) requirements. There is also a processing delay for redemption. The secondary market is traded independently by market participants. The price of stablecoins is affected by supply and demand, and sometimes deviates from the anchor price of 1 USD. Stablecoins have both technical and monetary characteristics, and there are several points worth noting.
1. Digital technology improves payment and settlement efficiency, but without decentralization
In theory, stablecoins run on the distributed ledger of the blockchain and have decentralized properties. At the same time, stablecoins can be embedded in smart contracts to support applications such as lending and trading in decentralized finance (DeFi), and can be automatically executed without the need for traditional financial intermediaries, achieving fast and low-cost settlement. However, in reality, the decentralized nature of stablecoins has certain limitations. For example, the issuing companies of USDT and USDC have control over the issuance and redemption of stablecoins and the management of reserve funds, which instead presents certain centralized characteristics.
(II) From the perspective of holders, stablecoins are private currencies, not government currencies
According to the draft of the Stablecoin Guidance and Innovation Act (GENIUS Act) proposed by the United States in 2025, stablecoin issuers are prohibited from paying any form of interest to coin holders[6]. At the same time, the bill requires stablecoin issuers to hold no less than 1:1 highly liquid assets as reserves. From the perspective of currency attributes, stablecoins are essentially a private currency based on the credit of the US dollar and the credit of the issuing institution.
(III) From the issuer’s perspective, the stablecoin model is similar to a “narrow bank”, which is not only a liability
The operation of stablecoins is similar to the narrow banking model. Traditional banks adopt the "short debt and long investment" model, that is, using short-term deposits to issue long-term loans. The mismatch of maturity may trigger a liquidity crisis, such as bank panics and bank runs that have occurred many times in history. The modern central bank system improves financial stability through the design of a multi-level regulatory system, including various liquidity tools, deposit insurance systems, capital liquidity requirements, and macro-prudential policies. In contrast, stablecoins are similar to the concept of narrow banks. The core of stablecoins is to strictly limit the scope of business and only allow the holding of low-risk, high-liquidity assets, such as cash and short-term government bonds. By maintaining sufficient or even excess assets, it maintains its guarantee of deposit redemption and avoids crises caused by maturity mismatch, credit risk or excessive speculation. Under this model, the functions of money creation and credit issuance are separated: in some theoretical assumptions represented by the "Chicago Plan", narrow banks only serve as "currency warehouses" responsible for safekeeping deposits and providing payment services; while credit issuance such as corporate loans is completed by other non-bank financial institutions (such as professional lending institutions), and the two are strictly separated in law and finance.
(IV) RMB already has stablecoins: WeChat Pay and Alipay
From the perspective of economic mechanism, platform currencies and stablecoins of third-party payment tools have similar functions, and China has certain comparative advantages in this regard and has formed a relatively complete regulatory framework. China's digital payment industry, represented by WeChat Pay and Alipay, is in a leading position in the world. "WeChat Change" and "Alipay Balance" are the creditor's rights of users to payment institutions, supporting real-time account recharge and withdrawal to cards, and can be conveniently used in various consumption, transfer and financial scenarios. Under the centralized custody system of customer reserve funds, 100% of the funds must be deposited with the People's Bank of China (constituting the "non-financial institution deposits" item on the central bank's balance sheet) to constrain the use of funds by payment institutions and fully protect the security of users' assets. It can be seen that, similar to overseas stablecoins, platform currencies are also an extension of legal tender, and a mechanism is used to maintain a 1:1 ratio between digital currency symbols and legal tender. The difference is that the stability mechanism of platform currencies is stricter, and the security of customer reserve funds is actually guaranteed by the central bank's base currency. At the same time, standardized supervision makes its financial expansion attributes more strictly restricted.
2. As a payment tool, what costs can stablecoins reduce and what costs cannot they reduce?
At present, the user group of stablecoins in regular retail payments is very small, and the application scenarios are limited. Third-party payment platforms such as WeChat, Alipay, Apple Pay, and PayPal have formed network effects and economies of scale, and have the first-mover advantage of incumbents. In the same currency zone, from the perspective of payment convenience and security, stablecoins are not more advantageous than the existing third-party payment system. The potential of stablecoins to reduce transaction costs is mainly in cross-border payments.
What factors give stablecoins a low-cost advantage in cross-border payments? A relatively sufficient market competition pattern may be an important reason. The traditional banking system provides cross-border exchange and payment services for US dollars, but the clearing system is highly centralized. The New York Clearing House Interbank Payments System (CHIPS), as one of the core infrastructures of the US dollar cross-border payment and clearing system, undertakes about 96% of the world's cross-border US dollar payments[7]. Bank card switching and clearing institutions are dominated by a few oligopolies such as Visa and MasterCard. The first-mover advantage and scale effect lead to high entry barriers and industry concentration, which in turn pushes up transaction costs.
Third-party digital payment platforms have lower transaction costs between individuals than traditional cross-border payment systems and more transparent rates. These payment platforms usually integrate digital wallet functions, and the diverse user needs force suppliers to iterate and upgrade payment services, forming differentiated competition in different regions and usage scenarios. Many third-party payment platforms have formed their highlights in their niche areas. For example, Stripe provides low cross-border fee services and customizable business solutions. Its main service objects are online companies with large transaction volumes or international transaction needs. However, from the merchant level (payee), the transaction fees of third-party payments are still relatively high.
The openness and infrastructure architecture of stablecoins make it more likely to form a highly competitive market structure and bypass the existing payment system to achieve low-cost cross-border payments. First, the digital economic characteristics of stablecoins make it possible to use new technologies to reduce costs. For example, the competition and optimization of the public chain of stablecoins help to drive down transaction fees (gas fees). Second, the stablecoin market is relatively competitive, and multiple existing or potential issuers compete together around the world, which is conducive to maintaining transaction fees at a low level. Third, compared with the banking system and third-party digital payment platforms, stablecoins face loose regulation and have a certain regulatory arbitrage space. In contrast, the regulatory system of existing payment methods is relatively complete. Banks face strict constraints in capital adequacy ratio, deposit insurance, liquidity management, anti-money laundering (AML), KYC, etc., and third-party digital payment platforms have clear regulations in payment licenses, fund custody, anti-money laundering, cross-border settlement, etc. In contrast, stablecoins have strong anonymity and can usually bypass the traditional bank cross-border settlement system without strict foreign exchange or capital flow controls.
It is worth mentioning that stablecoins can reduce the cost of cross-border payments in the same currency, but for payments involving exchange between different currencies, the situation is more complicated. Stablecoins cannot eliminate the exchange fees between two currencies, which involves the local banking system, and regulatory requirements such as anti-money laundering and capital account controls increase transaction costs. Of course, as one of the trading currencies, the US dollar has economies of scale, and exchanges between other currencies are generally conducted through the US dollar. This cost advantage comes from the status of the US dollar as an international transaction medium. In terms of digital technology itself, the US dollar stablecoin does not necessarily have a competitive advantage over third-party payment tools or central bank digital currencies of other currencies. An important implication is that the role of stablecoins of other currencies in reducing the cost of cross-border economic activities is much more limited than that of the US dollar stablecoin.
3. Stablecoin supply is highly elastic, and its circulation is mainly determined by demand
From the perspective of stablecoin supply, the income of the issuer comes from the interest rate spread between assets and liabilities. Stablecoin issuers pay zero interest on the liability side, while the safe assets such as government bonds and bank deposits held on the asset side earn interest. The larger the net interest margin (interest rate spread minus operating expenses), the stronger the incentive for the issuer to provide stablecoins. In theory, as long as the net interest margin is positive, the supply may be unlimited. The market value of US dollar stablecoins has increased from a few billion in 2020 to more than US$220 billion in the first quarter of 2025, accounting for 99.8% of the total amount of fiat-pegged stablecoins[8]. In the past few years, the short-term interest rate of the US dollar has increased from near zero during the COVID-19 pandemic to around 4% now[9], bringing almost risk-free and large interest rate spreads to stablecoin issuers. This may explain why more and more institutions are willing to issue stablecoins.
Based on the characteristics of high supply elasticity, the circulation of stablecoins is basically determined by demand. As a non-interest-bearing payment tool, no one is willing to hold zero-interest assets that significantly exceed transaction demand. Due to the uncertainty of transaction demand, people are willing to hold some reserves, and the demand for reserves depends in part on the opportunity cost of interest losses. When the yield on bank deposits or other safe assets (such as government bonds) rises, the opportunity cost of holders increases, resulting in a decrease in the demand for reserves. In other words, the rise in US dollar interest rates in recent years should reduce the demand for stablecoins. So how do we explain the rapid growth of US dollar stablecoins during the same period?
From another perspective, the interest given up by stablecoin holders is the price they pay for the convenience provided by stablecoins. Higher interest rates lead to lower stablecoin balances, but the convenience benefits brought to holders by each unit of stablecoin increase. So what kind of convenience benefits can offset the opportunity cost brought about by a sharp increase in interest rates?
The first possibility is the currency substitution effect. As the incumbent international currency, the US dollar provides liquidity/safe assets. Especially for economies with high inflation or continuous depreciation of their own currencies, the US dollar can replace their own currencies. A survey found that developing countries such as Turkey, Argentina, Indonesia, and India have increased their willingness to hold stablecoins. For example, Turkey, which has high inflation, will use legal tender to purchase stablecoins equivalent to 3.7% of its GDP in 2023[10]. However, this currency substitution should be limited. From the perspective of value storage, especially considering the rising US interest rates, the substitution of the US dollar for the local currency should be more reflected in interest-bearing safe assets, such as US dollar deposits in local banks. Another possibility is that US dollar stablecoins replace US dollar cash, but there is no evidence to show the importance of this option. In contrast, both US dollar cash and stablecoins do not pay interest. Stablecoins are convenient to carry and have no risk of physical damage, especially in large payments. However, the advantage of US dollar cash is that there is no redemption risk.
The second possibility is in the field of traditional cross-border trade payments. Traditional cross-border payments have long been plagued by high costs and low efficiency, mainly due to factors such as monopolies caused by highly centralized infrastructure, complex and lengthy processes, and compliance costs being passed on layer by layer. In this context, stablecoins provide an alternative solution that bypasses or simplifies the traditional hierarchical structure, using digital means to achieve more direct cross-border payments, thereby breaking the existing pattern and reducing transaction costs. For cross-border e-commerce sellers, companies or individuals who frequently conduct small-scale cross-border trade, this cost reduction is very attractive, and may therefore bring about demand for stablecoins. However, reducing cross-border payment costs is not a "patent" of stablecoins. Digital payment platforms such as PayPal also have the potential to break the monopoly of traditional cross-border payments.
The third possibility is related to crypto-asset trading. In the past few years, the prices of crypto-assets such as Bitcoin have risen sharply and the volatility is high, which has increased the demand for US dollar stablecoins as reserves for crypto-asset trading. Stablecoins are not only the main intermediary for crypto-asset trading, but also an ideal safe haven during periods of price fluctuations of major crypto-assets such as Bitcoin[11]. Regardless of whether the Bitcoin market is rising or falling, the existence of derivatives such as futures contracts and perpetual contracts has led to a continuous increase in the market demand for stablecoins as collateral.
The fourth possibility is transaction demand related to underground economic activities, regulatory arbitrage, and circumvention of financial sanctions. The anonymity of stablecoins during transactions makes it difficult to track and regulate transactions, which facilitates illegal and irregular transactions, especially in cross-border payments. It can be used to bypass capital account controls and increase the difficulty of tax collection and anti-money laundering. The rewards obtained by circumventing regulation can be said to be the convenient benefits provided by stablecoins to their holders, which brings about the demand for stablecoins. Stablecoins can also be used to bypass the current US-dominated international payment system, thereby circumventing financial sanctions in geo-economic competition. For example, Russia has turned to stablecoins to promote oil trade with other countries, using USDT as a bridge for local currency trade settlement. Iran, Venezuela and other countries also have cases of using cryptocurrencies to conduct trade settlements [12].
Of the four possibilities above, the third and fourth are more reasonable guesses so far, and they are also related to a certain extent. Crypto asset transactions and gray transaction demand reinforce each other due to the weak regulatory environment of offshore exchanges. Most crypto exchage are established in offshore financial centers, making regulatory enforcement difficult and international regulatory cooperation difficult [13].
4. Future Development Potential: What Stablecoins Can and Cannot Do
How do you view the growth potential of stablecoins in the future? Similar to cash, bank demand deposits, and third-party payment reserves, the circulation of stablecoins is mainly determined by transaction demand, which brings an important meaning. In the absence of cross-border transactions, since no interest is paid, stablecoins have no obvious advantages over cash, demand deposits, and third-party payment systems. Although anonymity makes stablecoins easy to carry out underground economic activities, it may in turn promote underground economic activities. Such a positive cycle may encourage a shadow financial system with the purpose of gray transactions. It is difficult to imagine that monetary authorities will continue to tolerate such regulatory arbitrage. The growth potential of stablecoins lies in cross-border economic activities.
1. The growth potential of US dollar stablecoins is primarily due to the international currency status of the US dollar.
At the international level, the network advantage of the incumbent makes the US dollar the most likely to benefit from the market mechanism of stablecoins. In other words, the rapid growth of US dollar stablecoins is first of all the result of the US dollar as an international currency. Conversely, can stablecoins consolidate or even expand the role of the US dollar? This depends on the performance of stablecoins in the three major functions of currency (accounting unit, transaction medium, and value storage). Currency substitution may occur in all three functions. Which function is more important?
The credit of sovereign currency as a unit of account comes from the government's endorsement and is the core embodiment of a country's economic sovereignty. The extent to which the international expansion of the account currency established by public power or its erosion in the country is reflected in the market competition of its payment and value storage functions.
As mentioned above, in terms of the efficiency of payment means, the US dollar stablecoin benefits from the dollar's position as an international currency. At the same time, in terms of regulatory arbitrage, the United States has a higher degree of financial liberalization than other countries, and the impact of regulatory arbitrage on the United States is smaller than that on other economies, which also puts the US dollar stablecoin in a more advantageous position.
So, what is the source of the competitiveness of the US dollar as an international currency? The key is the means of storing value. The US financial market is large, deep and broad, and is the most open among large economies, attracting the participation of global investors, especially US Treasury bonds provide safe assets for the global market. The US dollar stablecoin benefits from the incumbent advantage of the US dollar as an international reserve currency. At the same time, as a new technical tool, the stablecoin provides a new carrier for the expansion of the US dollar as a means of storing value in the global market.
(II) US dollar stablecoins can in turn promote dollarization, but there are two obstacles
From a global perspective, the competition between currencies is a zero-sum game, and the gain of the US dollar in the international currency market means the loss of other countries. Based on the above analysis logic, the two main types of countries affected by the US dollar stablecoin are developing countries with weak financial systems, small economies, and large inflation and exchange rate fluctuations, and countries with capital account controls. Other countries' losses are mainly in two aspects. One is the loss of seigniorage and related income. The monetary income given up by the holders of the US dollar stablecoin is obtained by the stablecoin issuers and the US government. The latter is reflected in the demand for safe assets generated by the stablecoin, which reduces the cost of the US government's debt issuance. Second, the policy effectiveness of monetary management has declined. As a new payment tool, the overall scale of stablecoins is still relatively small, and regulators are still on the sidelines. However, as the issuance volume increases, its negative impact is apparent, and relevant policy authorities in other countries may respond by strengthening supervision to combat the demand for US dollar stablecoins.
Secondly, stablecoins themselves are also vulnerable. Although stablecoins are pegged to the US dollar, they are essentially private "currencies" issued by private institutions. Compared with payment methods that are regulated and protected under the central bank system (including third-party payment tools such as WeChat Pay and Alipay), the ability and willingness to invest in security by the private sector may be insufficient. This involves both technical mechanisms, such as the consensus mechanism and smart contracts of blockchain technology, which may have loopholes, and economic issues, especially the convertibility of stablecoins.
Although stablecoin issuers hold 100% of liquid assets as a redemption guarantee, it is difficult to completely avoid the collapse of holders' confidence in their anchored value. Since the development of stablecoins, there have been many cases of large-scale redemption or selling by a large number of users in a short period of time [14], which exceeded the coping capacity of their supporting mechanisms and eventually caused the value to decouple from the anchor (such as decoupling from the US dollar). For example, USDC quickly decoupled from the anchor after the collapse of Silicon Valley Bank (SVB) in 2023. In the digital and intelligent age, information, including false news, spreads quickly. Any rumor that the issuer has insufficient reserves may lead to panic runs, and panic has a herd effect.
Looking further ahead, there is a potential motivation for stablecoin issuers to leverage for profit and hold risky assets with low liquidity. This feature makes stablecoin issuers likely to become the "wildcat banks" of the new era. Take Tether as an example. Its reserve assets are not all cash and cash equivalents with high security and liquidity. They also include Bitcoin and precious metals whose prices may fluctuate violently, as well as secured loans and other investments that are not fully open and transparent[15]. Some people believe that compared with Circle's issuance of USDC, which has achieved 100% reserve compliance, Tether has less than 20% of its reserve assets that do not comply with the provisions of the Stablecoin Guidance and Innovation Act, but these assets are Tether's main source of profit[16].
It is worth mentioning that narrow banking, as a concept of financial reform, has not been implemented in reality because financial institutions have the function of expansion. Stablecoins are still in the early stages of development and face a favorable environment with high interest rate spreads. Looking ahead, if the Fed cuts interest rates and U.S. Treasury yields fall, the interest rate spread income of stablecoin issuers will be significantly narrowed. The profit-seeking motive may lead to the expansion of narrow banking business, increase credit risk and maturity mismatch on the asset side, and thus aggravate the credit risk of the issuer.
5. From crypto assets to reserve assets?
Recently, another topic related to the US dollar stablecoin (cryptocurrency) is that the US government will establish a "Strategic Bitcoin Reserve" and a "US Digital Asset Reserve" that includes digital assets other than Bitcoin [17]. There may be many reasons for being bullish on Bitcoin. More than ten years ago, many people believed that Bitcoin was a digital currency (cryptocurrency) that could replace the US dollar and was the monetary basis for decentralized finance in the future. Now, few people should hold such a view. The new narrative is that Bitcoin is a reserve asset, digital gold, and can support a monetary system centered on legal tender (US dollars). Therefore, from cryptocurrency to crypto assets, the latter serves as a reserve asset for the former, forming a closed loop, thereby building a new monetary system in the digital age.
We can analyze this issue from three perspectives. First, there is no closed loop from cryptocurrency to crypto assets. Although stablecoins use digital technology, they are private currencies pegged to the US dollar in an economic sense, an extension of the US dollar, and a debt currency. They have no economic mechanism connection with crypto assets such as Bitcoin.
Second, the currency form of the modern economy has long since changed from physical currency represented by gold to credit/debt currency, which also applies to today's "digital gold". The core feature of credit currency is that its value depends on the credit of the issuer (usually the government or central bank), so currency is closely related to "debt". The modern economy relies on "credit payments" (such as corporate credit sales, loan consumption, and bond trading), which requires currency to be transferable and have the ability to deferred payment. Debt currency naturally adapts to this demand through "creditor-debtor relationships". For example, bank deposits are essentially "creditor's rights to banks", and stablecoins are creditor's rights to their issuers, which can be transferred to third parties at any time.
Keynes called the gold standard a "relic of the barbaric age" to criticize the conflict between its rigid rules and the needs of the modern economy. The gold standard binds currency to gold, and the money supply is directly linked to gold reserves, resulting in monetary policy's lack of adaptability to economic cycles, which ultimately exacerbates economic fluctuations and even becomes the fuse for social inequality. Keynes's monetary view promoted the shift of monetary policy from "gold standard constraints" to "national credit dominance" in the 20th century, and also provided a theoretical basis for the "countercyclical regulation" of modern central banks (such as interest rate cuts and quantitative easing).
The ultimate endorsement of credit currency is national credit. As far as the US dollar is concerned, a key manifestation is that the base currency is the liability of the Federal Reserve, and the corresponding asset side is the US Treasury bonds it holds. The credit of bank money (broad money, or bank deposits) comes from government guarantees and supervision, including the central bank's lender of last resort, deposit insurance mechanism, and even comprehensive guarantees in times of crisis, which is an extension of government debt. The assets corresponding to the US dollar stablecoin are US Treasury bonds and other high-grade liquid assets, which are supported by government credit, but there is no supervision and guarantee mechanism to guarantee exchange like bank currency. Extending to the international level, the US dollar, as the world's main reserve currency, is based on the national credit of the United States, including the largest economy and the largest financial market.
Third, there may be another possibility that the government can enhance its credit by holding assets with potential for appreciation. For a small economy, due to its limited range of endogenous assets and insufficient long-term appreciation potential, it is reasonable to hold exogenous assets, such as the sovereign fund model of Norway and Singapore, or the central banks of some emerging markets and developing countries holding US dollar assets to enhance the external value of their currencies. However, it is difficult to imagine that the credit of a large economy, especially an economy that provides reserve currency for the world, can be effectively supported by the value of exogenous assets.
In a broader sense, beyond currency reserve assets, can crypto assets such as Bitcoin be used as strategic investments by the government? The long-term returns of assets can be divided into two categories: cash flow driven returns (stocks, bonds) and price volatility driven returns (gold). The former can achieve wealth appreciation through the "compound interest effect", and the level of compound interest depends on economic growth. The latter only comes from price fluctuations caused by changes in market supply and demand, and appreciation depends to a certain extent on the speculative behavior of "buy low and sell high".
Specifically, one possible reason for the government's strategic investment in crypto assets such as Bitcoin is that crypto assets such as Bitcoin involve encryption technologies such as blockchain. The government's support may promote innovation in this field, and the spillover effect of innovation may benefit the entire society, that is, enjoy the "compound interest effect" of innovation. Although this positive externality cannot be ruled out, it needs to be balanced with the negative externalities of Bitcoin. The scale diseconomy of Bitcoin means that the increase in demand for it can only achieve supply and demand balance through price increases, which has a squeezing effect on other investments, especially real investments. In this sense, the government's strategic investment in crypto assets such as Bitcoin is not necessarily better than investing in equity and stocks, or investing in basic research, and therefore does not have a natural necessity.
VI. Policy Implications
Based on the above analysis, there are three policy implications worth exploring.
First, the US dollar stablecoin contains the contradiction between the public goods attribute of the payment system and the private profit-seeking motive. The impact on macroeconomic and financial stability will force the strengthening of supervision. The core of the current development of the US dollar stablecoin is to rely on private institutions to issue private "currency" and allow the latter to rely on interest rate spreads for profit. This model is fundamentally contradictory to the public goods attribute of the payment system (required to be safe, stable, inclusive, etc.). Looking at the history of monetary and financial development, the public goods attribute of bank money has been gradually improved under the mechanism of financial supervision and government guarantee. The key to the success of China's WeChat Pay, Alipay and other digital payment models is that while adhering to market-oriented operations, it has adhered to the public goods attribute of payment channels through effective supervision. The general rule that market innovation in the financial field comes first and supervision is strengthened later should also apply to stablecoins.
Second, from the perspective of international currency competition, the United States benefits most from the stablecoin mechanism. As a private currency provided by narrow banks, the US dollar stablecoin benefits from the US dollar's status as an international reserve currency, including its incumbent advantages in the financial market. The expansion of the US dollar stablecoin is an extension of the US dollar's international reserve currency, and its network effects and regulatory arbitrage may in turn help strengthen the international status of the US dollar. For other non-US economies, facing the inherent advantages of incumbent international currencies in market competition, it is not the best strategy to develop local currency stablecoins to counter the US dollar stablecoin. This is not only because the comparative advantages of other countries are not in finance, but also may introduce new complexities and risks, such as impacting the efficiency of monetary management and capital account management, which may explain why the ECB emphasizes the development of a digital euro (central bank digital currency) to counter the US dollar stablecoin.
Third, for China, the key to the response is to give full play to the advantages of China's large scale of real economy and large population (broad application scenarios). We should vigorously promote the application of platform digital currencies such as WeChat Pay and Alipay in cross-border payment scenarios, and use the exogenous power of central bank digital currencies to support the development of platform currencies in cross-border payment business, and build a new type of efficient and low-cost cross-border payment infrastructure (including through multilateral central bank digital currency cooperation). The platform currency of third-party payment tools itself has the characteristics of stable currency. Compared with the US dollar stable currency, its real economic attributes are stronger and its financial attributes are weaker. Moreover, it has formed a certain network effect under the empowerment of the platform, which is China's comparative advantage.
Of course, stablecoins represent a new payment technology and model, which may have positive spillover effects that are not clear at present, and completely denying them is not the best option. It is worth discussing how to give full play to Hong Kong's unique advantages as an international financial center and the largest offshore RMB market. Taking Hong Kong as a controlled test field and regulatory correction field for RMB stablecoins is conducive to balancing the potential for technological innovation and maintaining the public goods attributes of payment, financial stability, and national monetary sovereignty.
