Much more needed to ready nation for stablecoins

The recent global momentum around stablecoin legislation has underscored the alternative currency's growing influence in today's international monetary and financial architecture. At the heart of this discussion lies a fundamental question: What exactly are stablecoins — and how should we understand their impact and relationship with sovereign currencies?

For readers unfamiliar with the concept, a stablecoin is a type of cryptocurrency that is pegged to fiat currencies or other real-world assets at a designated exchange rate to maintain a stable value.

The core value of stablecoins lies in their efficient payment and settlement function. Built on blockchain-based peer-to-peer networks, stablecoin transactions are settled instantly upon payment, offering significant advantages in terms of speed and cost. This functionality represents a fundamental and irreplaceable attribute of a currency.

Unlike highly volatile cryptocurrencies such as Bitcoin, stablecoins maintain price stability by being pegged to real-world assets — primarily US dollar-denominated assets. Leading stablecoins such as USDT and USDC derive more than 90 percent of their backing from short-term US Treasury securities and repurchase agreements.

This mechanism enables stablecoins to act as a bridge between the world of virtual currencies and the traditional fiat currency system, significantly enhancing the efficiency of cross-border payments while reducing costs.

On June 17, the US Senate passed the GENIUS Act. If passed by the House and signed by the US president, the bill would introduce a federal framework for regulating stablecoins in the United States.

The US' push for stablecoin legislation clearly serves its dollar-related interests: to modernize dollar-based payments, reinforce the dollar's international status and create trillions of dollars in additional demand for US Treasury debt. In that sense, the stablecoin model transforms the expansion of the cryptocurrency market into an extension of the US dollar's influence on blockchains.

Stablecoin vs sovereign currency

In analyzing all forms of so-called "currencies", one must always keep in mind a basic principle: as long as sovereign states exist, the sovereign nature of currencies cannot be altered.

Currency sovereignty is a vital component of national sovereignty. It refers to a country's highest authority to issue and manage its own currency domestically, as well as its fundamental right to independently implement monetary policy in the international arena and participate equally in global monetary and financial affairs.

The emergence of digital assets — including stablecoins — does not indicate the birth of some novel international monetary regime that functions beyond sovereignty. That means when used for international payments, stablecoins cannot bypass the regulatory oversight of currency exchange between sovereign currencies. Nor can they create new international currencies.

However, what they can do — by strengthening their role in payments — is gradually erode the functional role of sovereign currencies, given that payment and settlement represent the most essential and irreplaceable functions of currencies.

This has posed a challenge to national monetary systems and even the global monetary order — one that warrants proactive risk management.

In this context, China must adopt a dual-track strategy.

On the one hand, since no form of stablecoin can avoid the issue of monetary sovereignty, firmly promoting the internationalization of the renminbi remains the core task for the country to build a strong currency.

In this regard, all efforts made in the past — such as expanding local currency swap agreements, promoting the Cross-border Interbank Payment System, improving the global renminbi clearing network and increasing the use of the renminbi in trade and investment among economies participating in the Belt and Road Initiative — must continue with unwavering commitment.

Irreversible trend

On the other hand, it must be recognized that the convergence of stablecoins, cryptocurrencies and the traditional financial system is a trend unlikely to be reversed.

Stablecoins and cryptocurrencies will develop in tandem with central bank digital currency, comprehensively lifting payment efficiency, reducing costs and leading to the reconstruction of the global payment system — while also driving the growth of decentralized finance.

Although some economies previously supported only CBDC trials and others focused on stablecoin and cryptocurrency innovation, most have now shifted toward a model that supports the integrated development of all three.

The European Union, Japan, the United Arab Emirates, Singapore and the Hong Kong Special Administrative Region are typical examples of jurisdictions supporting such integrated development.

Any advancement in stablecoins must also address risks such as sovereign currency substitution, money laundering, user protections and potential disruptions to monetary policy transmission.

Looking ahead, China should leverage the Hong Kong SAR's advantages — including its status as a financial center and existing institutional base surrounding cryptocurrencies — to develop stablecoins pegged to the offshore renminbi, building a controllable international payment channel.

The Hong Kong SAR made history on May 30 by enacting the world's first dedicated legislation specifically governing fiat-referenced stablecoins — the Stablecoins Ordinance — with a commencement date of Aug 1.

In other words, renminbi stablecoins should be developed via offshore mechanisms. In fact, Tether — the world's largest stablecoin issuer — already launched its offshore renminbi stablecoin in 2019, which currently has a circulation exceeding 20 million yuan ($2.79 million).

At the same time, favorable conditions should be created to prudently and actively explore renminbi stablecoin development by leveraging Shanghai's role as an international financial center.

In short, stablecoins are not entirely new, independent currencies — they are, in essence, a technological upgrade and strategic extension of the US dollar system in the digital age.

Their rise highlights the centrality of payment and settlement systems and the core importance of account-based infrastructure. The global rush to legislate and regulate stablecoins is, in effect, a strategic attempt to control this critical node connecting the virtual system and the real world.

For China, the way forward lies in reinforcing economic fundamentals, strengthening the foundation of its sovereign currency, making good use of the Hong Kong SAR's offshore market to develop renminbi-backed stablecoins and advancing renminbi internationalization in a pragmatic manner.

These steps would hold the key for the country to navigate the shifting landscape and safeguard its monetary and financial security.

The writer is chairman of the National Institution for Finance & Development. The article is compiled based on a recent speech made by Li.

The views do not necessarily reflect those of China Daily.