Recently, the United States announced strong support for the development of cryptocurrencies and crypto assets, and announced that it would build a national strategic reserve of Bitcoin. This policy move has greatly stimulated the discussion and imagination of digital currencies around the world. Digital currency is a new form of currency that exists in digital form, based on cryptography and distributed ledger technologies, with the characteristics of decentralization, traceability, and non-tamperability. It can be used for transactions and value storage, including legal digital currency and virtual digital currency. Its rapid development not only provides new forms of currency and asset categories, but also may have a significant impact on the reconstruction of the international financial system.
Three digital currencies and their characteristics
Currently, there are three main digital currencies in the world, including cryptocurrencies represented by Bitcoin, stablecoins represented by USDT and USDC, and central bank digital currencies (CBDCs) represented by digital RMB (e-CNY). These three digital currencies have their own characteristics.
The value of cryptocurrency is determined neither by the sovereign credit of a country nor by other currencies or financial assets linked to the currency, but by a set of rigorous computer algorithms. For example, Bitcoin is determined by a set of computer algorithms and needs to be generated by "mining" with high-performance computers with strong computing power. The total amount of Bitcoin is fixed and is set by the algorithm to 21 million. There are currently about 19.8 million Bitcoins in circulation on the market, which means that there are only about 1 million Bitcoins waiting to be discovered by "mining" in the future. The most important feature of Bitcoin is decentralization, and its production is not linked to any national credit. In addition, its total amount is fixed, which is similar to gold, and can overcome the inflation tendency of any central bank, so it is considered to be used to hedge national currency risks. The biggest problem with Bitcoin is that its price fluctuates greatly. The price peak of a Bitcoin once reached more than $100,000, and it fell to around $86,000 in early March 2025.
The value of stablecoins is determined by other currencies or financial assets to which they are linked. The most popular stablecoins on the market are USDT and USDC, which together account for about 90% of the global stablecoin market value. As the name suggests, both USDT and USDC are pegged to the US dollar at a 1:1 exchange rate, so they are also called US dollar stablecoins. In addition, there are also stablecoins pegged to the euro, gold, cryptocurrencies, and a basket of commodities. To issue one unit of stablecoin, a fixed amount of currency or financial assets must be used as support. Therefore, compared with cryptocurrencies with huge price fluctuations, the price of stablecoins is much more stable.
Central bank digital currency refers to a digital currency issued by the central bank of a specific country. This digital currency is backed by the sovereign credit of a country and is pegged to the country's ordinary currency at a 1:1 ratio. The biggest advantage of central bank digital currency is that it is issued by a country's central bank and can be supported by the central bank's lender of last resort function when its value fluctuates greatly, so the financial risk is very low. However, the reputation of central bank digital currency is affected by the country's ordinary currency. If the exchange rate of the country's ordinary currency fluctuates greatly or the purchasing power depreciates rapidly, then the attractiveness of the country's central bank digital currency will naturally be weaker.
Bitcoin's Impact on the International Financial System
Although Bitcoin is a type of digital currency, it cannot truly perform the functions of currency due to its following two characteristics. On the one hand, the huge fluctuations in Bitcoin prices determine that Bitcoin is difficult to be used as a pricing scale for other commodities and a monetary medium for transactions between other commodities; on the other hand, due to the limited total amount of Bitcoin, it is difficult for Bitcoin to be used as a currency to regulate the operation of the economy. Under normal circumstances, as the total economic volume increases, a country's central bank will continue to issue new currencies to meet related needs, and the total amount of a country's currency is usually growing.
Therefore, the nature of Bitcoin is not a real currency, but a peculiar financial asset, which itself has investment value. Whether Bitcoin is a risky asset or a safe-haven asset is a matter of great controversy in the market. In terms of the huge price fluctuations of Bitcoin itself, it is more like a risky asset. However, from the perspective that the price trend of Bitcoin is largely inversely correlated with the trend of the US dollar exchange rate, it seems to be a safe-haven asset that can hedge against fluctuations in the US dollar exchange rate.
The impact of stablecoins on the international financial system
Among the three digital currencies, stablecoins are actually the ones that may have a major impact on the international financial system. As mentioned earlier, since stablecoins are linked to sovereign currencies, they indirectly have the nature of sovereign currencies. The US dollar stablecoin has the relevant characteristics of the US dollar, and the exchange rate is generally stable, so it is easier to be accepted by investors from all parties.
In recent years, the global market value of stablecoins has developed rapidly, and by the end of 2024 it has reached nearly US$180 billion. At present, stablecoins are "conquering" the following areas: First, US dollar stablecoins have begun to become a trading medium in the cryptocurrency market. In other words, when cryptocurrencies such as Bitcoin and Ethereum are traded with other currencies, both parties are increasingly inclined to use US dollar stablecoins for payment. This means that in the virtual world, US dollar stablecoins have begun to play the role of the US dollar. Second, in the decentralized financial system (DeFi), some institutions have begun to use US dollar stablecoins to provide liquidity support. For example, when the relevant subject needs to borrow a loan, it can directly apply for a US dollar stablecoin loan from a specific institution. Third, in some developing countries where the purchasing power and exchange rate of the national currency fluctuate greatly, residents and enterprises have begun to use US dollar stablecoins as a reliable international currency to store wealth, and US dollar stablecoins have even begun to replace national currencies to a certain extent.
The US dollar stablecoin not only strengthens the connection between the traditional currency circulation domain and the virtual world currency circulation domain, but also fills the gap in the demand for the US dollar by households and enterprises in some developing countries. Therefore, this digital currency is likely to strengthen the international currency status of the US dollar in the international financial system. Once the US dollar stablecoin links the international credit of the US dollar with the application scenarios of the virtual world more closely, it may greatly consolidate the hegemony of the US dollar.
The impact of central bank digital currency on the international financial system
Central bank digital currency is actually a sovereign currency in the virtual world. This currency has a stronger reputation and lower risks, but it ultimately depends on the competitiveness of the country's real currency. Of course, the level at which this central bank digital currency can be used is also an important issue. For example, the RMB is recognized worldwide as a sovereign credit currency with stable value. However, to date, the digital RMB can only be used in retail scenarios, that is, transactions between individuals and enterprises. The digital RMB can only replace cash (M0). Due to this restriction, transactions between enterprises, between enterprises and financial institutions, and between financial institutions are not currently applicable to the digital RMB. This means that the current main constraint on the development of the digital RMB is the limitation of usage scenarios. The reason why the People's Bank of China only allows it to replace cash (M0) in the early stages of the digital RMB trial is because this is a plan that has less impact on the current commercial banking system.
Response Strategies
Currently, there are three development directions of digital currencies in the world: cryptocurrency, stablecoin and central bank digital currency, each with its own advantages and disadvantages, development prospects and application directions. It is best not to bet on only one side, but to take a three-pronged approach and bet at the same time to maximize the dividends of the development of digital currency or digital assets. On the one hand, the replacement range of digital RMB should be expanded from M0 (cash) to M1 (cash plus demand deposits) and even M2 (cash plus all deposits) as soon as possible. Only by upgrading the replacement range of digital RMB from M0 to M1 or even M2 can the application scenarios of digital RMB be fully expanded, the use of digital RMB at home and abroad can be promoted, and the internationalization of RMB can be promoted. On the other hand, promote the construction of China's stable currency. Expand the use of digital tokens on Internet platforms and better combine the sovereign credit of RMB with the global application scenarios of Chinese platforms. As long as the design and risk control are appropriate, expanding the use of digital tokens on these platforms can significantly expand the international currency status of RMB, thereby more calmly responding to the challenges of US dollar stablecoins. In addition, the trial and promotion of digital special drawing rights (e-SDR) can be encouraged at the level of the International Monetary Fund (IMF). Special Drawing Rights (SDR) is a supranational currency created by the International Monetary Fund, pegged to a currency basket consisting of the US dollar, euro, renminbi, yen, and pound sterling. The current weights of the above five currencies are 41.73%, 30.93%, 10.92%, 8.33% and 8.09% respectively. SDR can currently only be used for transactions between the IMF and member countries, and between member countries. It is naturally better for a variety of digital currencies to flourish than for the US dollar to monopolize the digital currency development track. e-SDR can expand the use of supranational reserve currencies in the digital field and virtual space, and also help promote the diversification of the international monetary system.
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