How stablecoins are reshaping our financial world

Author: Deng Jianpeng (Professor, School of Law, Central University of Finance and Economics; Blockchain Law Research Expert)

I. The Quiet Digital Currency Revolution

Imagine a "digital dollar" whose value in the online world is almost equivalent to $1, allowing for rapid global transfers with fees only one-tenth that of traditional cross-border payments. This is stablecoin—one of the most revolutionary financial innovations of our time, and also the most controversial form of digital currency.

Since its inception in 2014, the stablecoin market has grown from zero to nearly $320 billion, equivalent to the annual GDP of a developed country like Switzerland. Even more astonishingly, Tether, the company that issues USDT, has generated $13.7 billion in annual net profit with fewer than 200 employees, averaging nearly $100 million per employee—dozens of times more efficient than traditional financial giants.

This digital financial revolution is changing our payment methods, investment habits, and even challenging the foundations of the traditional financial system at an unprecedented pace. Let's delve into all aspects of stablecoins, see how they affect our wallets, and where they will lead the world. II. Stablecoins: The “Hard Currency” of the Digital World What are stablecoins? Simply put, a stablecoin is a cryptocurrency that attempts to maintain a 1:1 exchange rate with a certain fiat currency (primarily the US dollar). However, this “stability” is relative. Take the most common Tether (USDT) or USDC as an example. In most cases, people can treat it as equivalent to $1 when trading on the secondary market or shopping offline, but its price may also be slightly higher than $1, and in extreme cases, it may be lower than $1 or even become worthless. **Technical Foundation: A Global Ledger on the Blockchain** Stablecoin tokens operate on a public blockchain, with traders recording transactions on the same blockchain ledger. This ledger can be the Ethereum network, Bitcoin network, Solana network, etc. The blockchain is essentially a globally unified ledger, enabling peer-to-peer transactions without intermediaries, with arrival times as fast as sending an email. However, this convenience comes at a cost: if the amount sent is incorrect or to the wrong address, it's virtually impossible to trace or recover the funds due to the lack of a third-party intermediary. It's like putting cash in the wrong pocket; once it leaves your hand, it's very difficult to get it back. **Market Status Quo: The Dominance of USD-Backed Stablecoins** When we discuss stablecoins, we are primarily discussing USD-backed stablecoins. Since the emergence of Tether in 2014, fiat-backed stablecoins have become mainstream, with USD-backed stablecoins accounting for as much as 95% of the market capitalization. On August 23, 2025, the total market capitalization of stablecoins reached over $260 billion, and by early November it had exceeded $310 billion, demonstrating rapid growth. In terms of market capitalization distribution, Tether (USDT) and USDC together account for over 80%, becoming a focus of research for academia and regulatory agencies. Although the market capitalization of stablecoins was relatively small six or seven years ago, their turnover rate was extremely high—in 2019, the daily turnover rate reached as high as 500%, and the total monthly trading volume exceeded $3 trillion, with influence far exceeding its market capitalization. Astonishing Profitability Circle, the issuer of USDC, is a representative of compliant stablecoin issuers, with a stablecoin market capitalization of approximately $70 billion. After its listing in June of this year, its stock price increased tenfold within a month, causing a sensation in the investment community. Even more surprising is Tether's profitability. This company, with fewer than 200 employees, achieved a net profit of $13.7 billion last year, nearly $100 million per employee. In comparison, international credit card giant VISA, with 30,000 employees, had a net profit of $19.7 billion last year. This clearly demonstrates the profitability and market appeal of stablecoins.

Three Core Characteristics of Stablecoins

1. Centralized Issuance and Decentralized Circulation

Unlike central bank digital currencies, stablecoins are issued by private institutions and do not rely on direct government intervention. For example, Tether (TEDA) has achieved decentralized asset circulation using a public blockchain ledger, and its stablecoin circulates freely in a globally integrated blockchain network, including networks such as Bitcoin, Ethereum, Polkadot, and Solana. This borderless, cross-jurisdictional circulation model breaks through traditional geographical and judicial boundaries, posing a new challenge to the traditional financial regulatory system.

2. Efficient Payment and Settlement System Compared to traditional payments, stablecoins eliminate the need for intermediaries, offering the shortest payment path and instant settlement, with payment, clearing, and settlement all completed in one step. Cross-border payment fees are approximately 1/10 or even lower than traditional payments, giving them a significant advantage in the cross-border payment field. For the approximately 900-1 billion unbanked individuals globally, stablecoins require no bank account; all that's needed is a mobile phone and internet access to download a cryptocurrency wallet to participate in global payments, demonstrating extremely high financial inclusion.

3. Innovative Issuance and Redemption Mechanism

The issuance process of stablecoins is as follows: Authorized participants (such as large institutions) apply to Tether for the issuance of 100 million stablecoins. After approval, they transfer 100 million USDT to Tether's bank account. Upon receiving the funds, Tether issues 100 million USDT to the institution's crypto wallet. Simultaneously, 10%-20% of the transferred funds are reserved as a USD fund reserve to meet redemption demands, while the remaining 70%-80% is primarily used to invest in highly liquid, low-risk US Treasury bonds (within 93 days) and other similar instruments (annualized yield of 4.25%). With this business model, Tether achieves near-risk-free profits.

The redemption process is the opposite: Authorized participants send Tether tokens to a designated wallet. Tether sells US Treasury bonds to obtain cash and pays the authorized participants, while simultaneously destroying the corresponding Tether tokens.

This mechanism ensures a dynamic balance between the supply of stablecoins and reserve assets. Future Outlook: The Integration of Stablecoins and Artificial Intelligence The combination of stablecoins and artificial intelligence has broad prospects and is of great research value. Currently, the application of artificial intelligence in the financial field is limited by its inability to independently open accounts; AI agents cannot hold cash or complete payments, resulting in their functions remaining at a rudimentary stage, such as intelligent customer service and intelligent investment advisory. The quasi-anonymity (no identity verification required) and decentralized nature of blockchain technology can precisely compensate for this deficiency, enabling AI agents to make autonomous payments through cryptocurrency wallets. This combination will fundamentally change the rules of the real economy: for example, AI agents can autonomously plan travel itineraries and book flights and hotels for users, or incentivize netizens to create content through stablecoin reward mechanisms, achieving seamless 24/7 transactions. Compared to the limitations of traditional finance due to legal constraints, a large number of practical cases of autonomous token issuance and intelligent rewarding have emerged on the blockchain. This integration may not only reshape the structure of rights and obligations in the financial field, but also give rise to entirely new transaction models, providing a breakthrough with significant academic value for future financial research.

III. Four Major Risks and Challenges of Stablecoins

Based on research reports from renowned international financial organizations such as the Bank for International Settlements and the Financial Stability Board, as well as industry observations, we can summarize the following four main risks and challenges of stablecoins:

(I) Risks of Illegal Activities and Regulatory Avoidance

Perpetrators of crimes such as telecommunications fraud, drug trafficking, and organ trafficking often use stablecoins as tools to launder huge profits. Stablecoins possess a certain degree of anonymity and pseudonymity, have no identity verification requirements, and blockchain does not rely on traditional financial rules.

To enhance anonymity, criminals also utilize coin mixers, such as the Tornado Cash mixer sanctioned by the United States, which can completely conceal their identities. Even North Korean hackers use such tools to evade tracking. More importantly, stablecoins, based on the peer-to-peer transaction characteristics of non-custodial wallets, bypass regulated third-party entities, rendering traditional anti-money laundering and counter-terrorism financing systems ineffective, greatly weakening the effectiveness of financial regulation, and becoming a "gray channel" for the cross-border flow of illicit funds. (II) Challenges to Monetary Sovereignty and Monetary Policy The large-scale cross-border use of US dollar stablecoins infringes upon the monetary sovereignty of other countries. In countries with severe inflation, such as Zimbabwe and Turkey, some have annual inflation rates reaching 70%, and some even as high as 200%. Rational individuals will naturally choose to exchange their domestic fiat currency for a US dollar stablecoin. This rational choice will directly weaken the demand for their domestic currency, creating a substitution effect for fiat currency and impacting monetary sovereignty measures such as foreign exchange controls. Traditional regulatory methods are almost ineffective in this regard; unless extreme measures such as internet shutdowns are taken, it is difficult to prevent capital outflows through stablecoin channels. This undoubtedly poses a fundamental challenge to the ability of countries to maintain monetary stability and implement independent monetary policies. (III) Financial Stability and Systemic Risks Stablecoin issuers, in pursuit of profit maximization, may purchase high-risk investment products, posing significant potential risks. For example, stablecoin issuers initially used US dollar cash to purchase Bitcoin, which experienced extreme volatility between 2015 and 2021, with daily fluctuations of 30%-70% being common. Under US regulatory rules, stablecoin reserve funds are not federally insured in banks, posing potential risks. Furthermore, stablecoins have repeatedly experienced de-pegging events. For example, the algorithmic stablecoin LUNA went from a 1:1 exchange rate with the US dollar to 0.14, ultimately resulting in a $50 billion market capitalization collapse to zero, causing many people to lose everything. Historically, stablecoins lacking effective regulation and without a real-world asset backing pose significant risks.

(IV) Cross-border Regulatory Coordination and Compliance Dilemmas

The characteristic of stablecoins achieving seamless global circulation through public blockchains leads to fundamental dilemmas in cross-border regulatory coordination and compliance: Different countries have significantly different attitudes towards the regulation of stablecoins. For example, China has a complete ban, the US has limited liberalization, Hong Kong allows licensed operation, while some other countries or regions choose to completely ignore it (laissez-faire).

The decentralized architecture of public blockchains naturally places issuing institutions outside of any single jurisdiction, creating direct conflict with the financial regulatory rules of any single nation-state. While powerful financial regulators like the US can enforce compliance and overseas enforcement by issuing institutions through long-arm jurisdiction (such as FinCEN under the US Treasury Department), the lack of regulatory capacity in weaker countries allows issuing institutions to arbitrarily circumvent relevant regulations in these countries or regions. This makes it difficult to implement the same business, the same risks, and the same regulatory principles in practice, and can lead to regulatory arbitrage. When global judicial institutions frequently request the freezing of assets due to stablecoins' involvement in crimes such as telecom fraud and drug trafficking, issuing institutions (such as Tether) will inevitably choose selective judicial assistance when dealing with billions of cross-border requests for legal assistance, prioritizing responses to powerful countries like the US while ignoring the demands of weaker countries. Ultimately, this leads to a compliance deadlock in cross-border anti-money laundering cooperation where the "strong take all, the weak are left helpless."

IV. The US Stablecoin Regulatory Framework and Global Impact

The GENIUS Act passed by the US in July of this year has a noteworthy regulatory framework for stablecoins, especially regarding US dollar stablecoins and their global impact, which deserves in-depth analysis.

Core Contents of the Regulatory Framework

From the perspective of reserve requirements, the Act requires issuing institutions to either back 100% of their reserves in US dollars or hold US Treasury securities with a maturity of 93 days or less, ensuring high liquidity, low risk, and substantial returns. Issuing institutions can only choose between cash and US Treasury securities; other forms of reserves are not permitted.

In terms of regulatory tiers, issuances with a market capitalization exceeding $10 billion are regulated by the Federal Reserve System, the Treasury Department, and the Office of the Comptroller of the Currency, while those below $10 billion are regulated by the states.

The federal regulation of USDC issuers, and the "focus on the big, let the small" approach, offers valuable insights for future regulatory laws in China. The bill prohibits misleading marketing, requires issuers to comply with anti-money laundering and know-your-customer (KYC) regulations, and mandates annual audits of financial statements to ensure transparency. Previously, Tether was considered a "carrier" in the field, boasting a market capitalization of $170 billion since its launch in 2014, but it has lacked effective regulation for nearly a decade. While it claims each Tether coin is backed by one dollar of reserve assets, this claim has long been questioned. Although early independent auditing firms proved its reserves were sufficient, no institution dared to audit it for the next seven or eight years. Its dollar reserves were once held in banks in unknown Central American countries, causing concern among stablecoin holders who feared a Tether collapse would lead to a Bitcoin crash. Therefore, transparency is crucial, and this US rule has reshaped the industry. Anti-Money Laundering Responsibility and Regulatory Technology The GENIUS Act designates issuers as the "primary responsible party" for anti-money laundering and combating illicit financial activities, requiring them to possess the technological capabilities to respond immediately when the FBI requests the freezing of Tether (USDT) suspected of being involved in illegal activities. Simultaneously, the U.S. Treasury Department's FinCEN (Department for Crime Enforcement Networks) requires the development of detailed rules and new tools to monitor Tether cryptocurrency activities and review compliance programs. Strategic Intent and Global Impact While this act is significant and beneficial to the entire cryptocurrency sector, its strategic intent warrants vigilance from financial regulatory agencies worldwide. On the one hand, it sets rules for the industry, reshapes global rules, and influences the direction of rules in this field globally. On the other hand, it solidifies the peg mechanism between stablecoins and the US dollar and US Treasury bonds, constructing a perfect closed loop of the US dollar, stablecoins, and US Treasury bonds, encouraging, promoting, and even forcing issuing institutions to become major buyers of US Treasury bonds, strengthening the status of the US dollar in the international monetary system, increasing global acceptance and demand for the digitalization of the US dollar, and further consolidating the US dollar's international financial dominance. Potential Problems and Regulatory Deficiencies The US rules also have some problems. First, there is no federal insurance guarantee for reserves. Extreme risks could trigger problems, such as the risk encountered last year when Circle's approximately $3 billion in reserves held in Silicon Valley Bank led to a drop in the USDC stablecoin's exchange rate from 1:1 to 0.8. Second, the cornerstones of stablecoin security are not addressed in current legislation. For example, verifiable reserve transparency, redemption commitments, predictable and orderly risk management, and risk management processes are not mentioned. Third, details such as real-time reporting of redemptions and liquidity, daily net asset value reporting, and third-party transparent auditing are not fully reflected in the MiCA (Military Asset Regulation Act) regulations for crypto assets in the United States, Hong Kong, and the European Union. These are areas that future financial regulatory research needs to focus on exploring. Furthermore, USD stablecoins pose significant privacy risks. Stablecoin transaction records, relying on public blockchains, are permanently stored on the blockchain, accessible to everyone. This could potentially leak users' personal privacy and trade secrets. How future regulatory rules will protect user privacy and trade secrets urgently needs to be explored. V. The Sovereignty Game of Digital Currencies and the Impact of Stablecoins Background of Sino-US Financial Competition In recent years, the intense competition between China and the United States in the international financial field has had a profound impact on USD stablecoins. Since 2017, financial security conflicts between China and the US at the international financial system level have intensified. Following the Russia-Ukraine war in 2022, the US and the EU imposed over 6,000 sanctions on Russia, including removing it from SWIFT, triggering widespread concern about financial sanctions in other countries. As a major economic and financial power, China must consider countermeasures, such as de-dollarization, issuing a central bank digital currency, and collaborating with Belt and Road Initiative countries to build digital currency bridges. However, these solutions have various limitations. Against this backdrop, stablecoins may represent another window of opportunity for China. A New Pillar of Dollar Hegemony Over the past two years, the dollar has weakened, and US Treasury bonds have become less popular. Some financial experts believe that US financial hegemony is declining, and international financial power is shifting. However, the dollar-denominated stablecoins promoted by the US GENIUS Act may bring new opportunities and even reverse this trend. The rapid growth of US dollar stablecoins has made their issuers major buyers of US Treasury bonds, holding $128 billion in the past 12 months, making them among the top 20 holders of US Treasury bonds and surpassing sovereign nations such as Germany and Saudi Arabia. A Citibank research report indicates that stablecoin holdings of US Treasury bonds could surge to $3.7 trillion by 2030, ranking first globally and potentially reversing the decline of the dollar's hegemony. Among all stablecoin types, US dollar stablecoins are projected to be the most popular in the past and next decade. Citizens in countries with weaker fiat currencies tend to prefer stronger currencies, accelerating the marginalization of other less creditworthy fiat currencies and even impacting the internationalization of the renminbi. A new mechanism for money creation also exists for stablecoin issuers. A 2025 report by the Bank for International Settlements argues that stablecoins lack flexibility, but the actual issuers engage in money creation and credit expansion. Taking Tether as an example, suppose the issuing institution receives $1 million in cash from authorized participants (similar to M1). A small portion of the cash is deposited in a bank, while the majority is invested (such as purchasing US Treasury bonds or even gold). Simultaneously, it pays authorized participants $1 million in USDT, which is close to M2. USDT is essentially a liability certificate of Tether to its holders, but after receiving USDT, holders can use it for transactions. USDT essentially functions as currency (similar to M1), effectively creating money out of thin air. This multiplier effect of money creation can drive up asset prices in certain sectors, leading to inflation in specific areas (such as crypto assets), challenging the central bank's monopoly on money creation. Current regulations have given little consideration to this issue, making it worthy of in-depth research from a financial perspective. This problem was particularly serious in the early stages of the cryptocurrency field, with some suspecting that Tether was the culprit behind Bitcoin price fluctuations. Connecting Two Financial Worlds Driven by compliance, the GENIUS Act defines stablecoins as payment instruments rather than securities, prohibits the payment of interest to issuers, and grants them M1-type monetary status. USD stablecoins bridge the gap between the fiat currency world and the crypto asset world, providing digital payment and settlement media for exchanges, decentralized finance (DeFi), and non-fungible peer-to-peer (NFP) ecosystems, connecting crypto finance and traditional finance, and reshaping these two sectors. In cross-border payments, stablecoins offer advantages in efficiency and low cost. Simultaneously, in offline payment scenarios, stablecoins are increasingly integrated with Mastercard and Visa cards. By topping up USDT to a Visa card and linking it to WeChat Pay and Apple Pay, transactions can be made at offline locations such as roadside barbecue stalls, although transaction fees are relatively high. This trend unites blockchain finance and traditional finance, challenging traditional financial regulatory rules. VI. The Challenges of Stablecoins to China's Financial Security and Policy Reconsideration Specific Challenges Faced by China Stablecoins pose numerous challenges to China's financial security. On the one hand, there is a potential crisis of marginalization of the mainstream payment system and replacement of fiat currency. Although China does not experience the severe inflation seen in Argentina, USD stablecoins, relying on blockchain technology to build an efficient cross-border payment network, allow international merchants to directly accept USD stablecoins, bypassing my country's traditional payment system such as foreign exchange controls. This makes it impossible for my country's State Administration of Foreign Exchange to monitor foreign exchange transactions, threatening monetary sovereignty and financial security. Simultaneously, stablecoins' cooperation with compliant credit card institutions and card organizations to build global payment channels impacts the regulation of existing third-party payment channels in China. Moreover, USD stablecoins may circumvent traditional payment systems in cross-border payments, including the multi-currency bridge and CIPS that China has painstakingly built. Furthermore, stablecoins, relying on blockchain for peer-to-peer cross-border payments, may challenge the "trilemma" of China's financial regulations, simultaneously disrupting the three goals of free capital flow, independent monetary policy, and exchange rate management. Investors can weaken their demand for domestic currency by selling it and hoarding USD stablecoins, especially when USD investment yields reach 4%-5% and RMB depreciation is expected; this conversion behavior is even more pronounced. Cryptocurrency market volatility further exacerbates the risk—when asset prices like Bitcoin surge, investors will convert large amounts of RMB into stablecoins to buy Bitcoin. This high-yield and automated settlement characteristic not only challenges traditional bank settlement models but also impacts exchange rate stability through capital outflows, potentially rendering traditional capital control measures ineffective. Reflections on Chinese Regulatory Policies: In 2021, the People's Bank of China and other departments issued the "Notice on Further Preventing and Handling Risks of Virtual Currency Trading and Speculation," the purpose of which is to strictly prohibit virtual currency trading. While curbing the risks of cryptocurrency speculation was significant at the time, it created a regulatory vacuum in the long run. From a private law perspective, it fails to effectively protect the rights of legitimate stablecoin holders; from a public law perspective, it cannot effectively address issues such as money laundering, terrorist financing, and capital flight associated with dollar-denominated stablecoins. Furthermore, central bank regulatory policies have generated unexpected ripple effects. For example, after the regulatory policy issued on September 4, 2017, the direct trading channels between Bitcoin and fiat currency facilitated by trading platforms were cut off. Trading integrating stablecoins and Bitcoin became a new option for investors, leading to a rapid increase in stablecoin usage and Bitcoin's shift from being priced in RMB to USD—something regulators did not want to see. As the ancients said, "Institutions must be carefully examined, laws must be cautiously applied, and state affairs must be handled with care." The introduction of financial regulatory policies requires careful consideration to avoid the unintended consequences of "campaign-style enforcement." China's Response Strategy: First, the regulatory philosophy needs adjustment, shifting from repressive regulation to collaborative governance. Collaborative governance is not about regulators making decisions alone. For example, the "cryptocurrency-free blockchain" policy is debatable. Various key stakeholders in stablecoins, such as issuing institutions, authorized participants, cryptocurrency wallet issuers, and cryptocurrency platforms, should come together to discuss regulatory rules and explore a balance between innovation and risk prevention. Currently, Hong Kong's regulatory rules are overly stringent, and the prospects for locally issued stablecoins are likely not optimistic. Initially, relevant regulations could be more flexible and moderate. Second, building a monetary firewall and enhancing financial counter-sanction capabilities are crucial. China can gradually open up stablecoins in stages, at different levels, and by region, using Hong Kong as a testing ground to explore experiences and gradually form China's future regulatory rules. Simultaneously, multilateral stablecoin cooperation should be carried out, prioritizing the issuance of stablecoins pegged to offshore RMB, followed by onshore RMB issuance, in synergy with RMB internationalization. At the international governance level, China should work with the Bank for International Settlements and the International Monetary Fund to promote the formulation of international rules and enhance its voice. Domestically, it should improve regulatory technology and use AI to identify abnormal transactions. Furthermore, expanding the application scenarios of RMB-pegged stablecoins is crucial. For example, through RWA (Real-World Assets), Ant Financial has successfully commissioned multiple issuances in Hong Kong, enabling future on-chain transactions to be directly paid for with RMB stablecoins, opening up development space for RMB stablecoins. Conclusion: Seizing Opportunities Amidst Challenges Stablecoins represent the forefront of digital finance development, bringing both unprecedented challenges and significant opportunities. For China, the key lies in how to both mitigate risks and seize the wave of digital financial innovation. Against the backdrop of dollar-denominated stablecoins accelerating their global expansion through the GENIUS Act, China's response strategy needs to be more intelligent and flexible. On the one hand, it is necessary to safeguard financial security and monetary sovereignty; on the other hand, it is also essential to actively participate in this digital financial revolution and promote the internationalization of the RMB to find new breakthroughs in the era of digital currency. Future financial competition will not only be a competition between currencies, but also a competition of digital currency rules and standards. China needs to make its voice heard in this competition and formulate a regulatory framework that aligns with its own interests and international trends in order to secure a favorable position in the new era of digital finance.