Stablecoin Risks and Regulation: Challenges of Monetary Sovereignty and Financial Policy

With the development of crypto-assets and cryptocurrencies, stablecoins have further developed as pricing and trading tools for crypto-assets. As tokens representing fiat currencies, stablecoins possess quasi-currency characteristics, forming the infrastructure of crypto-finance and a bridge between crypto-finance and traditional finance. Without stablecoins, the two aforementioned financial sectors would develop in isolation, with crypto-finance having no impact on the real economy. Cryptocurrencies would mostly serve as speculative tools, while stablecoins bridge these two markets. While acting as a bridge, stablecoins broaden the scope of crypto-finance, but they can also push risks into the traditional financial system. Conversely, risks arising from the traditional financial system can also affect the crypto-finance space. The application of stablecoins originated from the demand for crypto-asset transactions, but with their introduction, they are increasingly entering the physical realm, such as cross-border payments. In the future, they may also find greater application in retail, B2B, and supply chain finance. It has begun to move from on-chain payments to off-chain, and its importance is becoming increasingly prominent. Furthermore, as more off-chain assets are brought on-chain, known as RWAs, on-chain transactions will see increasing demand for stablecoins as payment and trading tools. Therefore, we must consider the impact and risks that stablecoins pose to the financial system. Stablecoins and the Banking System Although stablecoins are tokens of existing currencies, in some countries with less developed financial systems or high inflation, they are widely used as payment tools in commercial activities. They also serve as a measure of value and a store of value, becoming de facto currencies. With the increasing off-chain application of stablecoins, especially in cross-border payments, their monetary function is becoming increasingly prominent. This trend has posed a certain impact on traditional banking payment systems. Stablecoins may also have a structural impact on banks, prompting a shift from small deposits to large ones and a concentration of deposits from small banks to large ones. In this process, while the total amount of deposits remains unchanged, the deposit structure changes. Large banks will gain more large deposits and business opportunities, while small and medium-sized banks may be at a competitive disadvantage. This change not only affects banks' business models but also has potential profound implications for financial market stability. The Relationship between Stablecoins and Central Bank Digital Currencies Stablecoins and central bank digital currencies are not necessarily in competition, but may instead feature both a division of labor and synergy. For example, state-owned enterprises and large enterprises may rely more heavily on the more secure central bank digital currency system for transactions, while many small and medium-sized enterprises and individuals prefer market-issued stablecoins due to their higher requirements for transaction speed and convenience. This division of labor allows stablecoins and central bank digital currencies to complement each other. Furthermore, they can also function in a coordinated manner. For example, requiring stablecoin issuers to hold central bank digital currencies (CBDCs) as reserves allows for direct linkage to the central bank digital currency, rather than relying solely on short-term Treasury bonds. In economies with high inflation and low financial development, dollar-denominated stablecoins could replace local currencies, leading to a phenomenon known as dollarization. This would benefit the dollar's international standing and strengthen its hegemony, but it also poses significant risks to the United States. If the United States were to place the dollar on a blockchain for global issuance, it would be similar to the development of the offshore dollar in the past. The current size of the offshore dollar is enormous, posing certain challenges to the Federal Reserve's control over the monetary supply and interest rates. In the future, the size of the dollar on a blockchain could also be substantial, similar to the vast offshore dollar. A dollar-denominated stablecoin would also influence the decisions of the US monetary authorities. Stablecoins and Macroeconomic Policy With the diversification of stablecoin issuers, fintech companies are gradually becoming important players in currency issuance. This trend has both positive aspects and new risks. If stablecoin issuance is based on government bonds held by fintech companies, the right to issue currency may shift from the central bank to the Ministry of Finance to some extent, thereby weakening the central bank's power. Stablecoin issuance has an impact on monetary and fiscal policy. With the issuance of stablecoins and the development of on-chain finance, the intermediary function of banks may be squeezed, affecting the transmission mechanism of monetary policy, similar to the role of shadow banking. The reserve assets of stablecoins require an increase in demand for short-term government bonds, affecting the central bank's control over short-term interest rates and shifting the maturity structure of government bonds, leading to problems with the government's short-term debt and long-term investment. Stablecoins and RMB Internationalization RMB internationalization cannot achieve a major breakthrough solely through RMB stablecoins. Ultimately, it still depends on the opening of the capital account and full currency convertibility. Capital account opening is the "principle," while stablecoins are merely the "technique." Techniques alone cannot solve the "principle" problem. However, with the increase in the use of RMB stablecoins, demand for offshore RMB assets will surge, driving the development of the offshore RMB market. When the offshore RMB market reaches a certain size, a gap between onshore and offshore RMB interest rates and exchange rates will develop, triggering large-scale cross-border capital arbitrage. This could impact capital account controls, prompting mainland China to accelerate the opening of its capital account.

Conclusion

As an emerging financial infrastructure, stablecoins play an important role in improving payment efficiency and connecting on-chain crypto finance with traditional finance. However, they also bring new risks and challenges. We must pay close attention to the risks of stablecoins, fully utilize digital technology to strengthen supervision of stablecoin issuance and trading, and promote the development of offshore RMB stablecoins. Only in this way can we enjoy the convenience and efficiency brought by stablecoins while effectively guarding against the financial risks they may cause and ensuring the stability and healthy development of the financial system.