Deng Jianpeng: On the Challenges of US Dollar Stablecoins, Regulatory Competition, and China's Solutions

About the Author: Deng Jianpeng, Professor and Doctoral Supervisor at the School of Law, Central University of Finance and Economics, and Director of the Center for Fintech Rule of Law Research. This article was originally published in the Journal of Financial Law, Issue 6, 2025. Abstract: The introduction of the US GENIUS Act marks the beginning of a new phase in the reshaping of rules for digital currency competition. Compared with the EU's MiCA Act and the Hong Kong SAR's Stablecoin Ordinance, the US GENIUS Act achieves a digital extension of the US dollar's international dominance through a closed loop of US dollar, stablecoin, and US Treasury bonds. The current mainstream stablecoins are essentially dollar-denominated stablecoins, convertible roughly one-to-one with the US dollar. These coins pose potential challenges to China's financial security and monetary sovereignty in areas such as cross-border payments, capital flows, and monetary policy transmission. To address this, my country can adjust its regulatory approach and adopt practical solutions, such as building a sovereign currency firewall, an offshore RMB stablecoin system, a penetrating regulatory technology platform, and a collaborative ecosystem for the tokenization of real-world assets. With Hong Kong as a strategic fulcrum, China can advance offshore RMB stablecoin pilot programs and practices in phases. Furthermore, China can collaborate with Belt and Road Initiative countries to establish a multilateral stablecoin alliance. Simultaneously, China can improve on-chain fund monitoring and legislative safeguards. This will open up new paths for RMB internationalization in the digital era and contribute to safeguarding China's financial security and monetary sovereignty.

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Table of Contents

I. Financial Changes and Regulatory Challenges under the Rise of Stablecoins

II. U.S. Stablecoin Regulatory Framework and Potential Impact

(I) The Connotation, Characteristics and Shortcomings of the U.S. Act from a Comparative Perspective

(II) The Game of Digital Currency Sovereignty and the Impact of Stablecoins

(III) Reconstruction of the financial ecosystem driven by compliance

III. Challenges of US dollar stablecoins to China’s financial security and policy reconsideration

(I) Impact on China’s financial security

(II) Rethinking China’s repressive regulatory policy

IV. Reflection on China’s response strategy

(I) Adjustment from repressive regulation to collaborative governance

(II) Building a monetary firewall and enhancing financial counter-sanction capabilities

(I) The connotation, characteristics and shortcomings of the US Act from a comparative perspective

The key contents of the US GENIUS Act include: (1) Reserve requirements: Stablecoin issuers must be 100% backed by reserves, and the reserve assets must be highly liquid assets such as US dollars and short-term US Treasury bonds; (2) Regulatory levels: Stablecoin issuers in the United States with a stablecoin market value of more than US$10 billion must be directly regulated by the Federal Reserve System or the Office of the Comptroller of the Currency (OCC), and small issuers can be regulated by the state; (3) Transparency and compliance requirements: Misleading marketing is prohibited, and issuers are required to comply with anti-money laundering (AML) and "know your customer" (KYC) regulations. Issuers with a market value of more than US$50 billion must undergo annual financial statement audits to ensure transparency. The GENIUS Act attempts to use emerging technologies to prevent illegal financial risks. On the one hand, the bill places issuers as the primary responsible party for anti-money laundering and combating illicit financial activities, ensuring that stablecoin issuers possess the technical capabilities to combat illicit financial activities in accordance with regulatory requirements. Furthermore, the GENIUS Act requires the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) to develop new anti-money laundering rules for crypto-asset activities, as well as new tools to monitor illicit crypto activity and review issuers' compliance programs. The GENIUS Act establishes clear rules for stablecoin issuance, reserve requirements, transparency, and oversight, solidifying the stablecoin's peg to the U.S. dollar and establishing a closed loop between the dollar, stablecoins, and U.S. Treasury bonds. This design will enable stablecoin issuers to become significant long-term buyers of U.S. Treasury bonds. The GENIUS Act leverages stablecoins to strengthen the dollar's position in the international monetary system and increase global acceptance and demand for digital payments using the dollar. Furthermore, the Act exports regulatory rules, requiring overseas issuers to comply with U.S. standards within a two-year transition period. This transforms dollar-denominated stablecoins into a global digital payment infrastructure, effectively becoming a digital extension of the dollar and a global extension of its influence. The GENIUS Act restricts the compliance of non-US dollar stablecoins in the US, but does not restrict the compliance of US dollar stablecoins abroad. At the federal level, the US law clarifies the definition of a stablecoin, compliance requirements for issuers, responsible regulatory bodies, and the scope of stablecoin operations, providing a regulatory framework for "larger scale and wider penetration" of blockchain financial activities. Since 2023, MiCA has provided a categorized regulatory framework for the EU cryptoasset market, pioneering categorized regulation for electronic money tokens (EMTs) and asset-referenced tokens (ARTs). It also established differentiated regulatory rules, explicitly restricting the payment function of non-euro stablecoins in the eurozone. The electronic money token category specifically refers to stablecoins pegged to a single fiat currency and primarily used as a payment instrument. Only compliant euro stablecoins can be used to pay for goods and services. Under MiCA regulations, e-money token issuers must qualify as an EU electronic money institution or credit institution, publish a white paper detailing the token structure and collateral, ensure token holders have redemption rights against the issuer, maintain sufficient reserves, and support free redemption. Stablecoins, a potentially influential subcategory of cryptoassets, could pose risks to financial stability due to their network effects and ability to transfer large amounts across borders if adopted on a large scale in the absence of global regulation. MiCA strives to strike a balance between innovation and stability by establishing clear guidelines on issuance, reserve management, and transparency. These regulatory frameworks reflect a broad consensus on stablecoin oversight, aiming to enhance financial market stability while supporting technological innovation. The Hong Kong Special Administrative Region's Stablecoin Ordinance officially came into effect on August 1, 2025, and the relevant detailed regulations, the "Guidelines for the Supervision of Licensed Stablecoin Issuers," have been issued. The Stablecoin Ordinance defines stablecoins as being pegged to any fiat currency, including the Hong Kong dollar, US dollar, and RMB. Only licensed institutions are authorized to sell stablecoins to retail investors. Any institution issuing a fiat stablecoin in Hong Kong, or issuing a Hong Kong dollar-pegged stablecoin overseas and promoting it in Hong Kong, must obtain a license from the Hong Kong Monetary Authority (HKMA). Stablecoin issuers must hold 100% highly liquid assets (such as cash or short-term government bonds) as reserves, conduct independent custody, and conduct regular audits. They must ensure that stablecoin holders can redeem their stablecoins promptly at face value. Non-bank institutions must meet a minimum share capital requirement of HK$25 million. Licensed institutions must adhere to strict anti-money laundering/countering the financing of terrorism (AML/CFT), risk management, cybersecurity, and information disclosure regulations. All transactions require real-name authentication (KYC), ensuring full traceability of funds flows. Hong Kong's regulatory framework provides for offshore RMB stablecoins, facilitating the exploration of using RMB-pegged stablecoins to address cross-border payment bottlenecks in Belt and Road Initiative projects. The MiCA Act establishes financial security barriers through high compliance costs. Influenced by regulatory rules, well-known cryptoasset trading platforms such as Coinbase have removed USDT from EU users, effectively creating a digital euro protection zone, building a digital defense for the euro's monetary sovereignty and paving the way for the future launch of a digital euro or a compliant euro-based stablecoin. Hong Kong, through the Stablecoin Ordinance, is vying for a voice in global digital finance and crypto assets. By launching local compliant stablecoins and gradually introducing cryptocurrency-friendly policies, it aims to strengthen Hong Kong's competitive position as an international financial center. In summary, stablecoin regulation exhibits significant regional differentiation, with three main models currently emerging: the US Treasury-bound model, the EU monetary sovereignty defense model, and the Hong Kong offshore hub model. Hong Kong's relevant regulations maintain a neutral monetary policy stance. The GENIUS Act strengthens the dollar's dominance in global currency markets, while the EU's regulatory laws and regulations feature a barrier-like strategy. In recent years, nearly all on-chain asset transactions have used US dollar stablecoins as payment instruments. When traditional assets are put on-chain, RWAs are also often denominated in US dollar stablecoins. The GENIUS Act will further consolidate the dollar's pricing power over on-chain assets. In the global competition for stablecoin regulation, the GENIUS Act, leveraging the massive first-mover advantage of the US dollar stablecoin market, is most likely to impact the markets of other fiat-currency stablecoins and strengthen their leading position. Regulatory frameworks in various developed economies vary, but they generally share common requirements for reserve transparency, anti-money laundering and counter-terrorist financing, bankruptcy protection, and consumer protections. These core principles will also serve as an important reference for future Chinese regulations. However, the GENIUS Act also has some shortcomings. First, it lacks a lender of last resort or insurance backstop for stablecoins. If a bank where a US dollar stablecoin issuer holds cash or other assets experiences risk, the impact on the stablecoin's price and liquidity will be instantly amplified on-chain. Second, verifiable reserve transparency, enforceable redemption commitments, and a rehearsable, orderly disposal by stablecoin issuers are the cornerstones of a healthy stablecoin, yet these fundamentals appear to have received little attention from legislators. Third, a sound regulatory framework for stablecoins requires real-time reporting of redemptions and liquidity, daily net asset value reporting, a minimum short-term liquidity ratio, and regular, transparent internal audits. These core elements are yet to be fully reflected in legislation in various jurisdictions, including the United States. Finally, the public blockchains underlying stablecoins act like surveillance networks, with every financial transaction being public data. This poses risks to user privacy and trade secrets, a risk that is also underrepresented in the legislation. Once a user's stablecoin wallet address is publicly available, since this address typically stores a user's historical stablecoin payment history, third-party technology companies can analyze and reveal the user's fund size, fund transactions, financial strategies, business intelligence, salary data, and the competitive advantages behind them. Therefore, enhancing privacy protection that is compatible with existing public blockchains and compliant with financial regulatory requirements should be a key component of future amendments to stablecoin legislation and a technological development direction for stablecoin issuers to enhance privacy protection. (II) The Competition for Digital Currency Sovereignty and the Impact of Stablecoins Since 2017, the financial security conflict between China and the United States within the international financial system has intensified. Following the outbreak of the Russia-Ukraine conflict in 2022, the United States indiscriminately imposed financial sanctions, prompting many countries around the world to accelerate their de-dollarization efforts to avoid the political risks of US financial sanctions or coercion. China is steadily advancing its de-dollarization efforts by conducting RMB trade settlement with numerous countries and continuously improving its internationalization system and infrastructure. This initiative aims to enhance its political autonomy by reducing its dependence on the US dollar system. Given the long-term nature of the Sino-US strategic competition, China's demand for and practice of de-dollarization, as well as the financial security conflict between China and the United States over this issue, will also persist. Scholars believe that, in the long term, this conflict could accelerate the decline of US financial hegemony and the structural shift in international financial power. However, dollar-denominated stablecoins are likely to present new opportunities for the United States. By tokenizing the dollar and ensuring that dollar tokens are based on U.S. assets, they align with core U.S. interests. Their rapid expansion could even reverse the decline of U.S. financial hegemony and the structural shift in international financial power. Specifically, the rapid growth and circulation of stablecoins continues to maintain and advance the dollar's dominance as an international currency, positioning stablecoin issuers as buyers of U.S. Treasury bonds. For most countries, stablecoins have become a new arena in the monetary sovereignty game. Researchers indicate that stablecoins held $128 billion in U.S. Treasury bonds over the past 12 months, making them one of the top 20 holders of U.S. Treasuries, surpassing sovereign states like Germany and Saudi Arabia. Citigroup predicts that by 2030, U.S. Treasury holdings by stablecoins could soar to $3.7 trillion, making them the world's largest holder. Issuers of dollar-denominated stablecoins have become crucial buyers of U.S. Treasuries. According to data from the stablecoin issuer's official website as of early August 2025, Tether has issued approximately $160 billion in USDT, with approximately 81% of its reserve assets held in U.S. Treasury bonds. This design creates an automatic cycle of purchasing U.S. Treasury bonds: global users purchase USD stablecoins with cash, issuers increase their holdings of U.S. Treasury bonds with cash, and this in turn reduces U.S. fiscal financing costs. The astonishing growth of stablecoins has increased their influence in the global financial sector. While USD stablecoins inevitably bypass the Society for Worldwide Interbank Financial Telecommunication (SWIFT) for payments and settlements, stablecoin payments do not bypass the dollar. The global adoption of USD stablecoins has created widespread demand for the dollar. Stablecoins are market-driven, with users tending to choose stablecoins with the most stable, strong, and widely accepted creditworthiness of the currency they are anchored to. This has made USD stablecoins the preferred choice for global users, marginalizing the less creditworthy fiat currencies of other countries, particularly in Africa and Latin America. USD stablecoins are more accessible and liquid in cross-border transactions, thereby reshaping the international financial landscape. US dollar stablecoins will have a multi-faceted impact on other countries' fiat currencies. On the one hand, strong fiat currencies offer significant competitive advantages over less competitive currencies (those with low international acceptance and severe depreciation). On the other hand, the quasi-currency circulation model based on blockchain ledgers provides an efficient and low-cost path for the internationalization of US dollar stablecoins. Therefore, China needs to actively consider how to enhance the competitiveness of its own currency and explore ways to enhance the internationalization of the RMB through technological empowerment. The GENIUS Act promotes the escalation of the US dollar's international monetary dominance. US dollar stablecoins are a digital extension of the US dollar's international monetary dominance, leveraging blockchain ledgers to enhance the dollar's international penetration. Furthermore, the US bill effectively exports global regulatory standards, forcing overseas US dollar stablecoin issuers to comply with US regulatory standards or be prohibited from providing services to US users. This "long-arm jurisdiction" makes the US dollar stablecoin standard a de facto global standard. While the EU allows compliant stablecoins pegged to the euro, the Hong Kong SAR allows stablecoins pegged to different currencies, and Japan and South Korea are also currently discussing legislation for stablecoins pegged to their respective fiat currencies, US dollar stablecoins offer the greatest liquidity and unparalleled first-mover advantage. Meanwhile, prominent US banks such as JPMorgan Chase and Citigroup are exploring joint issuance of stablecoins. Visa and MasterCard already support US dollar stablecoin settlement networks, expanding the US dollar payment system from SWIFT to blockchain networks and establishing a dominant dual-track US dollar clearing system. In short, the US GENIUS Act is driving the restructuring of the global financial system through US dollar stablecoins. This includes leveraging stablecoins to absorb Europe's massive US dollar market and leveraging the market-driven power of private issuers to promote stablecoins in developing countries across Asia, Africa, and Latin America, potentially replacing some or even large-scale local fiat currencies. Typically, money is categorized into base money (M0), narrow money (M1), and broad money (M2). M0 comprises cash in circulation and commercial bank cash reserves, M1 includes cash and demand deposits (used directly for payments), and M2 comprises M1 and time deposits (which must be converted into cash for payment). In practice, a stablecoin issuer (such as Tether) receives $1 million in cash (M1) from an authorized participant and uses the cash to purchase short-term U.S. Treasury bonds or other investments, while simultaneously paying the authorized participant one million USDT (equivalent to M2). These USDTs are essentially electronic certificates of the issuer's debt to the authorized participant. However, these debt certificates differ significantly from conventional debt certificates. USDTs are highly divisible (down to the penny), liquid, and globally accepted. They continue to serve as a payment and transaction medium in investment markets (particularly in the cryptoasset sector). They can also be lent and pledged on cryptoasset exchanges, generating investment and financial returns, essentially equivalent to highly liquid money like M1. As a result, this process functions similarly to commercial banks' money creation and credit expansion. Stablecoins act as an on-chain "dollar shadow bank." The issuer's reserve asset pool, akin to an "on-chain money market fund," invests user payments in assets such as short-term Treasury bonds, challenging the central bank's monopoly on currency issuance and commercial bank credit creation. The issuance and circulation of stablecoins will generate a multiplier effect on monetary derivatives, which regulations such as the GENIUS Act lack adequate provisions to address. Unregulated stablecoin issuers (such as Tether) could, due to their massive money creation, precipitate risks such as inflation, asset bubbles, over-indebtedness, bank runs, and resource misallocation in specific investment sectors (such as crypto assets). Their money creation function virtually transcends the purview of a country's traditional monetary policy. (III) Financial Ecosystem Restructuring Driven by Compliance The regulatory competition among developed economies surrounding stablecoins reflects the reshaping of rules and strategic initiatives in the context of international competition in crypto assets, and to a certain extent, a struggle for dominance in digital finance. Traditionally, only chartered banks could create readily usable forms of currency (such as demand deposits). The GENIUS Act defines stablecoins as payment instruments rather than securities, prohibits stablecoin issuers from paying interest, and grants them a status similar to M1 money, meaning that non-bank institutions gain the right to issue legal tender tokens. The guidance provided by the clarified regulatory path for compliant stablecoins has further boosted the market value of US dollar stablecoins. This expansion has shifted the US dollar clearing system towards blockchain-based digital dollar tokens, embedded in various distributed payment systems, achieving a paradigm shift. USD stablecoins provide a digital payment and settlement medium for ecosystems such as exchanges, decentralized finance (DeFi), and non-fungible tokens (NFTs). In the future, USD stablecoins have enormous potential to partially restructure the traditional financial system. For the vast number of impoverished people around the world who have mobile phones but no bank accounts, stablecoins directly provide efficient financial services, promote business development, and optimize the efficiency of capital allocation. People in underdeveloped countries or regions can use stablecoins to exchange weak-credit currencies for highly-credited ones, and use them to allocate assets such as US stocks, gold, and US bonds, generating various financial management and investment returns. Further regulatory compliance in the United States will encourage many outsiders to start using stablecoins, gaining more knowledge about crypto assets, increasing the number of crypto investors, and promoting the development of the blockchain financial ecosystem. The explosive growth of regulated USD stablecoins is also due to the maturity of blockchain infrastructure and its deep integration with payment scenarios. In terms of technological support, high-throughput public chains (such as Tron) have reduced stablecoin payment costs to one-tenth or even less than those of traditional cross-border payment systems. With shorter confirmation times, stablecoins outperform traditional cross-border remittances in both cost and efficiency. Therefore, stablecoins offer unique advantages in cross-border payments and international trade. Regarding innovative payment applications, international credit card giant Visa has partnered with US stablecoin issuer Circle to launch stablecoin bank cards. These Visa cards use the US dollar stablecoin USDC for underlying settlement. Furthermore, in recent years, crypto asset exchanges have partnered with Mastercard, another international credit card giant, to develop multi-token networks, integrating on-chain and off-chain assets. Mastercard has also partnered with digital debit cards (such as the USDT bank card, referred to in the industry as the "U Card"). Its core payment method involves using USDT to top up the U Card, providing users with a payment method that maintains a stable 1:1 exchange rate with the underlying fiat currency. The U Card can be linked to payment apps (such as Apple Pay, PayPal, Alipay, or WeChat Pay) for offline transactions. Unlike cryptocurrencies like Bitcoin, whose prices often fluctuate dramatically, the US dollar stablecoin makes the U card feasible for everyday payments. After the GENIUS Act takes effect, the U card may become a key payment card. The aforementioned international credit card giants are allowing the issuance of hybrid financial payment instruments that appear to be traditional bank cards but utilize stablecoins underneath. This transformation has enabled stablecoins to rapidly penetrate the blockchain financial ecosystem into mass international payment scenarios, profoundly impacting the traditional financial system. III. Challenges of US dollar stablecoins to China's financial security and policy reconsideration (I) Impact on China's financial security Building a strong financial nation is a crucial foundation for achieving financial security. In 2023, national leaders proposed building a strong financial nation, with a strong currency as one of the key elements of the "six strengths." To build a strong currency, it is necessary to ensure the stability of the RMB, safeguard its monetary sovereignty, and enhance its international standing. China needs to maintain its ability to defend against external financial shocks to ensure independent monetary policymaking, the stable operation of its financial system, and the sustainable development of its financial sector. However, the cross-border and disintermediation-free nature of US dollar stablecoins poses unprecedented challenges to the RMB monetary system. First and foremost is the risk of marginalization of mainstream payment systems and the potential threat of fiat currency substitution. US dollar stablecoins leverage blockchain technology to build efficient cross-border payment networks, bypassing traditional payment and clearing systems dominated by sovereign states. This could partially marginalize China's payment infrastructure and threaten the RMB's monetary sovereignty and financial security. Stablecoins partner with prominent international credit card institutions to establish global payment channels, expanding the application of offline payment scenarios in China and impacting existing bank payments, third-party payment channels, and financial regulation. The penetration of US dollar stablecoins in cross-border trade payments could undermine traditional payment systems. For example, despite the presence of multiple countries and the participation of numerous foreign banks in the Cross-Border Interbank Payment System (CIPS), China is vulnerable to geopolitical interference. If large amounts of US dollar stablecoins flow into China through overseas cryptoasset trading platforms, over-the-counter (OTC) transactions, or decentralized finance, this could create a backchannel for the digital dollar. Combined with the widespread use of U-cards, this would divert demand for RMB settlement in cross-border payment systems. Its multi-channel offline application scenarios could partially replace domestic fiat currencies. In some Asian, African, and Latin American countries, some groups have converted their savings into USDT, leading to a partial loss of deposits from their banking systems. If these digital dollar tokens spread along the Belt and Road Initiative, they could hinder the internationalization of the RMB. The aforementioned EU MiCA law explicitly restricts the use of non-euro stablecoins for commodity payments to protect the eurozone's payment sovereignty, providing valuable reference. Secondly, the "impossible trinity" is exacerbated. Stablecoins, relying on blockchain to enable peer-to-peer cross-border transfers, challenge the impossible triangle of "free capital flows, exchange rate stability, and independent monetary policy." When managing their economies, countries often face the dilemma of simultaneously achieving the three goals of free capital flows, exchange rate stability, and independent monetary policy, forcing them to choose between two of the three. This is known as the "impossible triangle" in economics. The technical features of stablecoins are simultaneously breaking down these three limitations. They circumvent capital controls by allowing citizens to exchange their domestic fiat currency for US dollar stablecoins via their mobile phones, enabling direct cross-border payments. They weaken exchange rate controls by allowing citizens to sell their domestic fiat currency and hoard US dollar stablecoins, reducing demand for their own currency and making it more difficult for the central bank to stabilize the exchange rate. They also disrupt interest rate policy. When domestic interest rates are cut, funds may flow into US dollar stablecoins and purchase stablecoin wealth management products on certain cryptoasset trading platforms to enjoy higher returns, potentially rendering domestic macroeconomic monetary policy ineffective. Stablecoins act like digital underground tunnels, allowing funds to flow freely in and out, bypassing national financial regulatory walls. This could lead to the simultaneous collapse of the country's control over capital controls, exchange rate stability, and interest rate regulation. (II) Rethinking China's Repressive Regulatory Policies In May 2021, the Financial Stability and Development Committee of the State Council held its 51st meeting, explicitly cracking down on Bitcoin mining and trading. In September 2021, the National Development and Reform Commission and other departments issued the "Notice on Regulating Virtual Currency Mining Activities," designating virtual currency mining as an industry to be eliminated. In September of the same year, the People's Bank of China and other ministries and commissions issued the "Notice on Further Preventing and Addressing the Risks of Virtual Currency Trading Speculation." This notice emphasizes that virtual currency-related activities, such as exchanging fiat currency for virtual currency, exchanging virtual currencies for one another, acting as a central counterparty for virtual currency trading, providing information intermediary and pricing services for virtual currency transactions, token issuance and financing, and virtual currency derivatives trading, are strictly prohibited and resolutely outlawed in accordance with the law. These activities are suspected of illegal financial activities, such as the illegal issuance of tokens and tickets, unauthorized public issuance of securities, illegal futures operations, and illegal fundraising. To this end, China's regulatory policies have adopted a negative assessment of crypto assets, including stablecoins, with an overall repressive regulatory approach. Regulatory documents in the crypto asset sector concern the boundaries of private entities' behavior, which can lead to adverse consequences such as diminishing rights and increasing obligations, significantly impacting citizens' existing property rights and interests. Regulators and judicial authorities tend to deem civil acts such as entrusted investment in crypto assets invalid due to their violation of public order and good morals. Legal holders of crypto assets are denied relief or protection for their losses, and are required to bear the relevant investment risks themselves and resolve disputes on their own. my country strictly prohibits on-exchange trading of cryptocurrencies and fiat currencies, but the stablecoin ecosystem continues to develop within the country's financial system. Therefore, my country's overly simplistic and crude regulatory approach to stablecoins effectively ignores the objective existence of stablecoins in my country. This repressive regulatory approach has created an institutional vacuum in the stablecoin sector. In the long term, it has failed to effectively protect the rights and interests of legitimate stablecoin holders at the private law level, leaving crypto assets, including stablecoins, facing the shadow of "objective illegality." This has led to legal barriers for individuals, businesses, and even public authorities in holding, trading, valuing, and disposing of these crypto assets. At the public law level, repressive regulatory policies fail to address in detail a range of issues, including the impact of dollar-denominated stablecoins on China's financial security, the use of stablecoins for money laundering, terrorist financing, capital flight, and the potential weakening of the domestic legal tender. Repressive regulation has led to insufficient Chinese participation in global stablecoin governance, resulting in a weakening of China's international rule-making power. The resulting institutional vacuum has failed to effectively address the trend of developed economies scrambling to establish regulatory rules and regulations, using legal frameworks to "discipline" stablecoins and manipulate them for their own ends. For example, issuers of dollar-denominated stablecoins have invested global user payments in assets such as U.S. Treasury bonds, becoming a key source of funding for the U.S. Treasury. Furthermore, repressive regulatory policies have had some unintended ripple effects. In September 2017, the People's Bank of China and other ministries and commissions issued the "Announcement on Preventing Risks in Token Issuance and Financing," explicitly prohibiting financial payment institutions from participating in cryptoasset businesses and requiring the withdrawal of domestic exchanges. Consequently, Chinese-backed cryptoasset exchanges have eliminated direct fiat currency trading services for cryptoassets, replacing them with crypto-to-crypto trading (such as between Bitcoin and Ethereum). However, this model fails to provide users with a way to cash out or preserve value when Bitcoin prices decline. Many exchanges have begun integrating USDT into their transactions as an alternative to fiat currency and a medium of exchange, gaining widespread popularity. USDT's market capitalization, which emerged in 2014, has since skyrocketed. For a long time, users of Chinese descent were the largest holders of USDT. Repressive regulatory policies have inadvertently fueled USDT's explosive growth and the digitization of the US dollar. As the ancients said, "Institutions must be carefully scrutinized, laws must be carefully governed, and state affairs must be handled with caution." To effectively mitigate long-term risks in the blockchain financial sector, more flexible governance mechanisms may be needed, not a one-size-fits-all approach. IV. Reflections on China's Response Strategy (I) From Repressive Regulation to Collaborative Governance Looking back over the past decade of stablecoin development, stablecoins have been driven by both market demand and fintech companies, growing and prospering in a relatively tolerant regulatory environment overseas. In 2025, Stripe, a renowned US payment service provider, reportedly announced the launch of the Tempo blockchain, designed specifically for stablecoin payments and enterprise applications. The goal is to build a blockchain that Stripe can control and optimize cross-border settlements. Scape plans to launch the Arc Chain, using USDC as the gas token (the "fuel" used to execute transactions on the blockchain), offering optional privacy features and a built-in foreign exchange engine. Tether and the cryptocurrency exchange Bitfinex announced the launch of the Plasma blockchain, creating settlement and financial infrastructure. These chains are compatible with the Ethereum Virtual Machine (EVM) architecture, connecting them to the Ethereum ecosystem. This demonstrates that competition and technological development in the stablecoin industry remain fierce and rapid, driving the industry's rapid growth and reaffirming that public blockchains like Ethereum are the fundamental infrastructure of the next-generation financial system. Therefore, China can shift its focus from consortium blockchain technology research and development to reconsidering the development of public blockchains. Previous policy concepts such as "coin-chain separation" and "coinless blockchains" differ significantly from some inclusive policies abroad and warrant reconsideration. Scholars argue that under a co-governance system, the government's role shifts from controller to service provider and facilitator, with law becoming a means of resolving shared challenges faced by all stakeholders. Governance involves shifting mindsets and achieving shared goals. Central and local governments, industry associations, online trading platforms, and businesses are all stakeholders in the policymaking and implementation process. This collaborative approach fosters constant negotiation among partners to adjust expectations, fostering the ability to embrace change and cope with uncertainty. The shift from a top-down, repressive regulatory model for stablecoins to collaborative governance is a flexible approach that will help my country better address the challenges posed by US dollar-denominated stablecoins. Scholars believe that the relationship between financial innovation and regulation has transcended the traditional binary opposition. The core regulatory objective is no longer simply to regulate, but to proactively align with the development trends of financial innovation and provide sustained impetus for financial innovation through regulation. With the accelerated opening up of my country's financial markets, the network interconnectedness of financial institutions, both domestically and internationally, is deepening. Systemic risks in my country's financial markets have entered a period of increasing frequency, facing the dual challenges of internal transformation and external challenges. The two markets, domestic and international, are intertwined and volatile. Simply suppressing various cryptoassets, including stablecoins, will not effectively isolate risks. It may also cause China to miss opportunities for the development of fintech, hindering financial innovation and efficiency. An inefficient financial system will erode its security foundations. Hong Kong's regulatory rules require issuers to comply with the Financial Action Task Force's "Travel Rule." This requires that the identities of the originator and beneficiary must be transmitted along with any virtual asset transfer. Issuers are also responsible for verifying the ultimate holders of their issued stablecoins. Since the beginning of 2025, US President Trump has pledged to make the United States the world's "crypto asset capital," and Hong Kong has also actively worked to establish itself as a global hub for Web3 and virtual assets. In the highly competitive global stablecoin market, overly stringent initial compliance requirements are likely to disadvantage Hong Kong's stablecoin industry compared to other more relaxed stablecoin projects that prioritize decentralization and relative anonymity. The GENIUS Act poses significant pressure on Hong Kong from "regulatory competition." We believe that Hong Kong, with its advantageous proximity to the mainland, can adopt a tolerant approach and, provided risks are manageable, promptly and appropriately adjust its stablecoin regulatory rules to attract and retain high-quality stablecoin issuers. Financial authorities should gradually absorb the lessons learned from regulatory practices and, over time, further refine regulatory rules and raise compliance thresholds. In the context of evolving regulatory philosophies, regulators must, on the one hand, uphold financial security and safeguard monetary sovereignty, and on the other, carefully assess the broader trends in global blockchain finance. Through consultation and communication with key domestic and international stablecoin stakeholders (stablecoin issuers, their reserve banks, centralized crypto asset exchanges, the core R&D teams of decentralized exchanges, crypto wallet providers, payment service providers, and cross-border trading companies as key authorized participants), they can jointly reach a "bottom-line approach" to stablecoin regulation and development, exploring a balanced approach in the collaborative governance and oversight of stablecoin risks. In the stablecoin sector, a multi-faceted collaborative governance approach is superior to a top-down, repressive regulatory model. Scholars argue that financial risk governance is a long-term, systematic endeavor. The financial system, constructed through laws, regulations, and rules in the financial sector, not only punishes illegal and irregular behavior that undermines financial security and order but also embraces financial innovation. The financial risk governance process requires the cooperation of multiple stakeholders to foster a collaborative governance approach. The theory of collaborative governance is guided by the impact mechanisms of different types of risks and emphasizes the systematic connection between various governance models within the governance framework. It emphasizes "multi-centered governance entities, the synergy of subsystems within dynamic systems, the synergy between self-organizations, and the stability of social order under shared rules." This concept is conducive to establishing a competitive and open financial market, effectively responding to the risks and challenges of stablecoins, and gaining institutional advantages in global competition. (II) Building a Monetary Firewall and Enhancing Financial Counter-Sanctions Capabilities China may consider a step-by-step, layered, and regional approach to gradually open up the issuance and circulation of stablecoins. In the early stages of stablecoin development, financial regulators may consider appropriately restricting the issuance of stablecoins not authorized by my country and issuing relevant financial regulatory rules, referencing the EU's MiCA regulation's restrictions on non-euro stablecoins. This could grant the People's Bank of China real-time banning powers, require domestic banks and payment institutions to restrict unauthorized stablecoin trading interfaces, and, in particular, require foreign issuers promoting stablecoins to Chinese citizens to accept oversight by Chinese financial regulators to safeguard monetary sovereignty. At the same time, regulators could establish an official exchange channel between the digital RMB and Hong Kong's stablecoin in the Guangdong-Hong Kong-Macao Greater Bay Area, connecting it to the Belt and Road trade platform and enabling real-time settlement of small-value trade. Issuing a stablecoin pegged to the RMB based on a permissionless blockchain would not only contribute to the internationalization of the RMB but also enhance my country's ability to counter sanctions in the financial sector. Scholars suggest that the United States imposes financial sanctions on sanctioned countries, and China needs to prepare for the potential negative impact of future US financial sanctions. The expansion of the cryptocurrency market and its demonstrated anti-sanction capabilities in some countries warrant significant attention and research. Scholars believe that the Multilateral Central Bank Digital Currency Bridge (mBridge) project, jointly launched by the Digital Currency Research Institute of the People's Bank of China, the Hong Kong Monetary Authority, the Bank of Thailand, and the Central Bank of the United Arab Emirates, aims to build a new cross-border payment infrastructure that bypasses the SWIFT system. mBridge could be the most effective alternative to SWIFT. However, this approach is likely overly optimistic. On the one hand, participating countries are susceptible to geopolitical influences. Under recent pressure from Europe and the United States, the effectiveness of the digital currency bridge remains to be seen. On the other hand, the market acceptance of central bank digital currencies has been very limited after their introduction. Unlike central bank digital currencies (CBDCs), which are centrally issued and have limited flexibility, stablecoins are globally issued and circulated on multiple permissionless blockchains. These blockchains are characterized by security, decentralization, and censorship resistance, making it difficult for other countries to impose sanctions or freeze them. Their application scenarios are theoretically infinitely diverse (such as programmability and integration with artificial intelligence for payments). Therefore, my country encourages qualified enterprises to issue stablecoins pegged to the offshore RMB at appropriate times. Promoting the parallel development of centralized account systems (traditional payment systems or central bank digital currencies) and blockchain-based distributed account systems is an important way to counter US financial sanctions in the future. In recent years, the United States has implemented restrictions and even bans on central bank digital currencies (CBDCs). In July 2025, the US House of Representatives passed the Anti-CBDC Surveillance State Act. In August of the same year, the US House of Representatives' new National Defense Authorization Act (NDAA) also added a provision titled "Anti-Central Bank Digital Currency Surveillance Act." Both bills prohibit the Federal Reserve from directly issuing central bank digital currencies to individuals, preventing them from being subject to surveillance and jeopardizing financial freedom. This bill is likely to impact the future development of China's digital yuan (DRM) overseas. After the September 11th attacks, the US seized control of SWIFT, using the system to block cross-border payment channels for sanctioned entities, making it a key tool for US financial sanctions. Digital currencies and alternative payment channels are weakening the dollar's position in the global monetary system, becoming channels and methods for circumventing sanctions, undermining the effectiveness of US financial sanctions and creating a new arena for the game of financial sanctions and counter-sanctions. National security measures have become a key regulatory tool in many countries, particularly the United States, for implementing economic policies, strengthening national regulation, defending against foreign investment, and protecting domestic industries. Under the pretext of national security, the US uses financial sanctions as a diplomatic tool to further its foreign policy and national security objectives. "Financial security is an integral part of national security." To enhance the internationalization of the RMB and China's ability to counter financial sanctions, regulators could encourage fintech companies to prioritize issuing RMB-pegged stablecoins in Hong Kong. This would be a good strategy. Given the significant advantages of US dollar-denominated stablecoins in terms of network and scale, China must respond promptly. Currently, Hong Kong should serve as a testing ground for steadily advancing pilot programs for offshore RMB stablecoins. Support should be provided for Hong Kong to collaborate with mainland free trade zones, and qualified fintech companies should be encouraged to participate in stablecoin issuance in Hong Kong, beginning with exploration of offshore RMB stablecoins. Accumulating experience through pilot programs will lay the foundation for the subsequent promotion of RMB stablecoins both within and outside China, and explore synergy mechanisms with central bank digital currencies. Offshore RMB stablecoins hold significant strategic value, potentially establishing a new RMB cross-border channel independent of international clearing systems and activating an offshore RMB liquidity pool exceeding one trillion yuan. Following the successful pilot in Hong Kong, financial regulators can promote multilateral stablecoin cooperation along the Belt and Road Initiative and jointly establish national sovereign funds to issue stablecoins pegged to the RMB. These efforts will open a new path for the internationalization of the digital RMB and become a key fulcrum for the reconstruction of the future cross-border trade payment system. This will not only potentially address the constraints on the RMB cross-border payment system, but also potentially establish a channel independent of the international funds clearing system. (III) Promoting International Rule-Based Governance and Technological Empowerment Scholars argue that, on the one hand, the current financial regulatory system is constructed according to a centralized financial services model, while the decentralized nature of the cryptocurrency system means that regulating cryptocurrencies solely according to the principle of "same activities, same risks, same rules" may ultimately be unworkable. On the other hand, current financial regulation and governance are nationalized, while cryptocurrency and decentralized finance are global. International regulatory organizations need to pay greater attention to and prioritize addressing the issue of "globalized business, nationalized governance" and guard against US hegemony in the global cryptocurrency governance system. Therefore, given the inherent cross-border flow of stablecoins, cross-border regulation and coordinated governance are crucial. At the governance level, Chinese financial regulators could consider the following strategies: First, advocate for international rules on sovereign licensing of stablecoins. Within the framework of the Bank for International Settlements, the International Monetary Fund (IMF), and the Basel Committee on Banking Supervision, this would require the issuance of stablecoins to be approved by the financial regulators of the country where the fiat currency is anchored, restricting the issuance of unlicensed/unregulated stablecoins and reducing their market share. Second, in terms of specific international rulemaking, national authorities and international organizations have generally reached consensus on regulatory rules regarding the risks associated with stablecoin issuance. These rules cover licensing, capital requirements, client fund safeguards, risk management, cybersecurity, anti-money laundering/counter-terrorist financing (AML/CFT), and consumer and investor protection. Based on this consensus and the need for financial security, Chinese regulators can make appropriate additions and deletions and actively participate in international rulemaking. Third, enhance regulatory technology, establish on-chain fund penetration monitoring, establish a cross-border stablecoin monitoring platform, and use artificial intelligence to identify abnormal fund flows. The regulatory vacuum surrounding decentralized finance and non-fungible tokens provides hidden channels for money laundering. For example, criminal groups exploit cross-chain exchanges to obscure fund flows, highlighting the urgency of regulatory technology upgrades. Tailoring governance strategies for stablecoins and technological upgrades can reduce stablecoin-related crimes. Advances in artificial intelligence and data integration, for example, offer new avenues for combating financial crime. These innovations can help reduce the mislabeling of legitimate transactions and improve the identification of fraudulent transactions. Leveraging transaction traceability information stored on the blockchain, they can track the flow of stablecoins within wallet networks. This can particularly strengthen anti-money laundering and other regulatory compliance when stablecoins interact with the regulated financial system. Current regulatory principles in Hong Kong are largely derived from traditional financial regulatory models. For example, Section 3.5.1 of the Hong Kong "Guidelines for the Supervision of Licensed Stablecoin Issuers" stipulates that licensees must establish adequate and effective customer account onboarding policies and procedures. Unless relevant customer due diligence has been completed, issuance or redemption services may not be provided to designated stablecoin holders and/or potential designated stablecoin holders. Traditional financial regulatory models (such as Know Your Customer (KYC)) are common in the financial industry. For example, credit reporting systems mitigate information asymmetry by establishing systematic mechanisms for collecting, processing, and sharing information. However, the effectiveness of traditional financial regulatory models is facing challenges in the blockchain finance sector. In 2019, the Financial Action Task Force (FATF) extended its global anti-money laundering and countering the financing of terrorism standards to cover virtual assets (VAs) and virtual asset service providers (VASPs). Under these rules, the FATF requires VASPs and financial institutions to obtain, retain, and transmit specific originator and beneficiary information when transferring virtual assets. In practice, this has resulted in significant compliance costs for regulated institutions. Furthermore, a large number of unregulated institutions (such as decentralized exchanges, decentralized mixers, and decentralized lending) have flouted these rules. Cryptocurrency exchanges serving global clients and some well-known stablecoin issuers have exploited the convenience of operating across multiple jurisdictions to engage in regulatory arbitrage and circumvent these rules. The stablecoin sector cannot simply adhere to traditional financial regulatory rules. Instead, it requires new regulatory wisdom and new technological tools to assist oversight. For example, on-chain data analysis capabilities, combined with artificial intelligence technology, can effectively identify suspicious transactions through on-chain behavioral analysis. Traditional identity verification is not necessarily essential. A report released by the Bank for International Settlements in August 2025 noted that public transaction histories on blockchains can support compliance efforts such as anti-money laundering and foreign exchange controls by tracing the source and flow of any specific unit or balance of a stablecoin. Anti-money laundering compliance scores generated based on the likelihood that a specific cryptoasset unit or balance is involved in illicit activity can be used as a reference at key points connecting to the banking system (i.e., "fiat currency exchange exits"). This can both block the influx of illicitly obtained funds and help foster a culture of due diligence among crypto market participants. The healthy development of stablecoins requires the reestablishment of a domestic policy environment for innovative governance mechanisms and technological autonomy. At the collaborative governance level, regulators can encourage stablecoin stakeholders, particularly blockchain technology companies, to develop technologies compatible with current mainstream blockchains and embed regulatory nodes within blockchain infrastructure. Regulators can monitor on-chain asset collateralization ratios, track systemic risks of stablecoin issuers, and observe market dynamics in real time, without having to wait for quarterly reports. Stablecoins are the earliest and most mature application of real-world asset tokenization. The widespread adoption of stablecoins has accelerated the tokenization of various assets, fostering a symbiotic ecosystem between stablecoins and asset tokenization. By 2025, world-renowned asset management firms such as BlackRock will launch tokenized funds like BUIDL, investing in assets such as US Treasuries, with total assets exceeding US$7 billion. These products allow investors to purchase shares of US Treasuries on-chain using US dollar stablecoins, providing a sustainable application scenario for stablecoins. Hong Kong is developing a diversified asset portfolio, and the HKMA encourages the development of RWAs. China can further promote synergies between offshore RWAs and RMB stablecoins. Stablecoins and RWAs represent on-chain funds and assets, respectively, while simultaneously developing RWAs to tokenize and trade real-world assets. The development of RWAs is a promising future direction for Hong Kong, China, and its integration with international trade payments could expand the application scenarios of RMB stablecoins. Hong Kong can leverage its advantages of mainland China and global exposure to establish a RWA hub. A regulatory innovation initiative, such as establishing an "RWA Sandbox" in Hong Kong, will prioritize the tokenization of mainland financial assets in Hong Kong, subject to quota approval by the State Administration of Foreign Exchange. This will enable automated on-chain cash flow disbursement and embed compliance rules into smart contracts. The integration of stablecoins and RWAs will reshape financial infrastructure. Leveraging blockchain technology, RWAs allow global investors to access these assets online, without the need for cross-border intermediaries or local accounts. This will significantly expand the investor base, increase willingness to hold, and ultimately open up new application scenarios for RMB stablecoins. V. Conclusion The regulatory competition for stablecoins essentially reflects a battle for dominance in digital finance. The United States' passage of the GENIUS Act establishes a closed loop between the US dollar, stablecoins, and US Treasury bonds, making US dollar stablecoins the largest buyer of US Treasury bonds and a digital vehicle for the global penetration of the US dollar. The promotion of offshore RMB stablecoins is the primary solution to countering the US dollar stablecoin market. Relevant financial regulatory rules should restrict the circulation of unauthorized stablecoins in mainland China, and an official exchange corridor between the digital RMB and Hong Kong's offshore RMB should be established in the Guangdong-Hong Kong-Macao Greater Bay Area. China can encourage international organizations such as the Bank for International Settlements to jointly develop international standards for sovereign licensing of stablecoins and establish an independent and controllable cross-border blockchain clearing network. Regarding implementation safeguards and risk mitigation, Chinese financial regulators can consider the consensus principles and existing deficiencies in current regulatory bills to build a more comprehensive stablecoin regulatory system and clarify the principles for sovereign licensing of stablecoins. The Supreme People's Court can issue judicial interpretations on stablecoin-related cases to clarify the legal nature of property in emerging areas such as stablecoins and protect the rights and interests of legitimate holders. Hong Kong's Stablecoin Ordinance provides the institutional foundation for RMB stablecoins. Tokenization of RWAs is a key application scenario for future RMB stablecoins. Easily digitized assets, such as financial assets, can be prioritized for tokenization, providing a wide range of application scenarios for RMB stablecoins and preventing them from operating in vain. To address the risks and challenges of stablecoins, regulatory technology must be proactively deployed, and regulators should prioritize collaborative governance mechanisms with various market players. Emerging risks such as cross-chain money laundering and algorithmic stablecoins require on-chain, penetrating oversight. This requires leveraging on-chain data analysis tools from stablecoin market participants to identify unusual transactions, thereby addressing the shortcomings of traditional regulatory rules and tools. Faced with the current trend in stablecoin development and regulation, my country should seize this strategic window to build a new ecosystem and approach for the internationalization of the digital RMB. While some scholars believe that the rapid development of cryptocurrencies and mobile payments is threatening the central bank's monetary anchoring role, sparking widespread global concern over core issues such as monetary sovereignty, payment system security, and financial stability, if RMB-pegged stablecoins develop healthily through the expansion of a wide range of application scenarios, the RMB's international status will be enhanced. The battle for financial sovereignty in the digital age requires China to transform external challenges into opportunities for RMB internationalization. Through a path of legislative defense, offshore offense, and global governance, leveraging Hong Kong's advantages under "one country, two systems," a Chinese approach can be constructed that balances financial security and innovation.