Stablecoins: Financial Innovation or Hidden Danger?

Stablecoins are currently at the forefront of regulatory reform. On July 18, 2025, US President Trump signed the Genius Act. This bill, for the first time, established clear federal regulatory standards for stablecoins, requiring 1:1 US dollar collateralization, regular audits, an instant redemption mechanism, and priority repayment for holders. While it brings legitimacy to the industry, it also reveals the underlying power dynamics. The most direct beneficiaries are mainstream stablecoin issuers with scale and transparency. The Genius Act explicitly stipulates that only institutions with federal licenses or those regulated by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) can issue "payment stablecoins," and issuers must hold high-quality reserve assets (such as US dollar cash or US Treasury bonds). As of July 22, 2025, the total global stablecoin market capitalization was approximately $268 billion. The leading stablecoins are as follows: 1. Tether (USDT). USDT is currently the world's largest stablecoin by market capitalization (approximately $161 billion) and most liquid, holding a significant amount of US Treasury bonds (nearly $100 billion). Its shortcomings include opaque auditing practices and numerous disputes over reserve disclosure. For example, in 2021, the US Commodity Futures Trading Commission (CFTC) fined Tether $41 million, finding that between 2016 and 2019, Tether claimed that each USDT issued was backed by "sufficient US dollar reserves," despite holding only a small amount of US dollar-denominated deposits, with the remainder consisting of commercial paper, loans, or third-party funds. That same year, the New York Attorney General's Office (NYAG) ruled that Tether and Bitfinex commingled company and client funds to cover a reserve shortfall of $850 million. The case was ultimately settled with a fine of $18.5 million. 2. USDC (USDC). USDC is currently the world's second-largest stablecoin by market capitalization (approximately $65 billion). Its advantages include transparent asset disclosure and public audits by the publicly listed company Circle, which leads to relatively high market trust. However, in 2023, affected by the Silicon Valley Bank (SVB) run (described in detail below), its price plummeted by over 10%. Ultimately, the Federal Reserve intervened to resolve the crisis, reversing the crisis. Other stablecoins with significant market capitalizations include DAI, Ethena USDe, and World Liberty USD1. USD1 is particularly noteworthy. USD1 is a stablecoin launched by World Liberty Financial, a company closely linked to the Trump family. Public information indicates that World Liberty Financial was founded in 2024, with the Trump family holding a 60% controlling stake and receiving 75% of token sale proceeds. USD1 was launched in March 2025. Management comprises a mix of Trump family members and external partners: US President Trump's sons, Eric Trump and Donald Trump Jr., both hold the title of "Web3 Ambassador" and participate in day-to-day management, while Trump himself is listed as "Chief Crypto Advocate." As the name suggests, one of the biggest selling points of stablecoins is that their value is locked 1:1 with fiat currency (such as the US dollar). The question, then, is whether stablecoins truly provide investors with the stability they claim to offer. To answer this question, let's examine two recent case studies. The first case is the UST algorithmic coin crash in 2022. In 2018, Do Kwon and Daniel Shin founded Terraform Labs in Singapore and launched its main products, UST and LUNA, forming an algorithmic stablecoin mechanism. When the price of UST exceeds $1, users can destroy an equivalent amount of LUNA and mint UST, then sell it on the market to profit from the difference. As the supply of UST increases and the price falls, its price should fall back to $1. When the price of UST falls below $1, users can exchange one UST for $1 worth of LUNA and then sell the exchanged LUNA for a profit. This operation destroys UST, reducing its supply and driving its price back to $1. The original intention of this design was to maintain UST's price peg based on arbitrage between UST and LUNA. A key assumption was that the stabilization mechanism relied on the value of LUNA. However, in May 2022, LUNA plummeted, and UST quickly decoupled from its peg, falling to approximately $0.1. This caused a combined market capitalization loss of approximately $4.5–5 billion for both, and triggered a decline of approximately $400 billion in the overall crypto market. Thousands of small investors lost their money, and some institutions, such as Singapore's Three Arrows Capital, collapsed, destabilizing the entire on-chain ecosystem. Subsequently, both UST and Luna were restructured and renamed. This incident became a classic example of the failure of algorithmic models, reminding investors not to naively trust "uncollateralized + algorithmic" stablecoin designs. A second example is the 2023 USDC and Silicon Valley Bank crisis. As of March 2023, USDC held $3.3 billion in cash reserves at Silicon Valley Bank, representing approximately 8% of its total reserve assets. On March 10, a bank run occurred at Silicon Valley Bank, triggering a chain reaction. Following news of the bank's takeover, USDC's price plummeted 12% to $0.88 in a single day, wiping out approximately $6 billion in market value. On March 12, the US Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation jointly announced a full guarantee for Silicon Valley Bank depositors, including balances exceeding the FDIC's $250,000 insurance limit. This announcement significantly alleviated market panic. On March 13, USDC's parent company, Circle, began processing redemption backlogs and restoring liquidity, allowing USDC to revert to its $1 peg. These two cases offer the following insights: First, for a stablecoin to be "stable," its anchor must be backed by real, liquid, low-risk assets. One of the most trusted collateral in the market is the US dollar or US Treasury bonds. Without reliable asset collateral, an event similar to the UST crash could recur, causing investor losses. Second, if stablecoins hope to become mainstream payment tools, they must be embedded in traditional financial regulatory structures, with compliant custody and national backing. Specifically, the stablecoin's anchor collateral must be held in an independent, transparent, auditable, and secure custodian account. As the USDC Silicon Valley Bank incident demonstrates, federal guarantees (such as those from the Federal Deposit Insurance Corporation and central bank liquidity support) are crucial for restoring confidence. To put it bluntly, stablecoins are essentially "bank-like liabilities." When investor confidence collapses, the market needs a "lender of last resort" to provide support. Third, the design of stablecoins should also consider the fairness of the redemption mechanism and liquidity stress testing. Even if the collateralized assets are real, if they cannot be quickly redeemed in times of stress, it could trigger a chain run caused by a "first-to-flight advantage." These three points form the essential "compliance triangle" for stablecoins: genuine collateral, secure custody and national trust, and redemption mechanisms and oversight. The recently passed "Genius Act" by the US government and the Stablecoins Ordinance, which the Hong Kong government will implement on August 1st, both aim to achieve this goal. While both are regulatory frameworks, their design philosophies, regulatory priorities, and beneficiaries differ. The US's Genius Act establishes a federal licensing mechanism, requiring stablecoin issuers to provide collateral equivalent in US dollars or Treasury bonds and be subject to FDIC or Federal Reserve oversight. It emphasizes the core functions of "payment stablecoins"—redemption, compliant issuance, and public audits. Hong Kong's Stablecoin Ordinance, on the other hand, requires issuers to obtain a license from the Hong Kong Monetary Authority, provide 100% collateralization, independent custody, and comply with anti-money laundering (AML) and counter-terrorism financing (CFT) regulations. The Ordinance places particular emphasis on the security and transparency of custodial assets, approaching a hybrid model of "regulatory sandbox + licensed issuance." Both laws emphasize transparency and risk control. The US focuses more on promoting the compliant use of payment stablecoins within the traditional financial system, making it suitable for established issuers. Hong Kong, on the other hand, adopts a licensing-based access mechanism, accommodating applications from innovative players and reserving institutional space for future offshore digital RMB applications. Whether it's the US's "compliance-driven access" approach or Hong Kong's "regulation-driven innovation," the ultimate goal is the same: to make stablecoins more than just "currencies," but rather "digital cash" that can be regulated and backed by a guarantee. Looking ahead, while the US and Hong Kong are pursuing different paths in stablecoin development, they are likely to form a landscape of both competition and complementarity. Leveraging the US dollar's sovereign currency status, global financial infrastructure, and the regulatory certainty provided by the Genius Act, the US is expected to promote deeper integration of dollar-denominated stablecoins like USDC and USDT into the international payment and clearing system, making them part of the global payment network and serving cross-border trade, e-commerce, and even small-value retail payments. Hong Kong, with its role as an international offshore financial center and the flexible licensing system and inclusive policies of the Stablecoin Ordinance, has the potential to become a bridgehead for the RMB's global expansion. With the entry of Chinese technology companies such as Ant and JD.com, Hong Kong's stablecoin may be the first to be implemented in scenarios such as cross-border RMB settlement, Southeast Asian digital finance, and Web3 trading platforms. It is foreseeable that China and the United States will engage in a certain degree of competition for the right to speak on the internationalization of stablecoins. More importantly, however, both institutional explorations are essentially aimed at ensuring stablecoins' financial compliance and systemic stability. In the future diversified and decentralized global financial architecture, US dollar and RMB stablecoins may form a parallel and complementary driving force in global finance. The stablecoin competition is ultimately a battle between rules and trust. Whoever can strike a balance between security, transparency, and efficiency will have the say in the future digital currency and financial system.