Clarifying the six misunderstandings about stablecoins

Author: Shen Jianguang, Zhu Taihui

Since the second half of 2023, stablecoins have entered a fast-growing track. The current market size has reached about 250 billion US dollars, with more than 250 million active accounts. Rapid integration with traditional payment institutions and banking systems has become a trend force for global financial innovation and development. At the same time, countries have taken advantage of the trend and actively supported the development of their own stablecoins. Countries and regions such as the European Union, Japan, Singapore, the United Arab Emirates, and Hong Kong, China have issued bills to regulate the innovative development of stablecoins. Since 2025, more than 10 major countries such as the United Kingdom, Australia, and South Korea have also announced relevant legislative plans. The market recognition and policy recognition of stablecoins in the world are rapidly increasing.

In particular, the US "GENIUS Act" was recently passed by the Senate, and the probability of its eventual passage by Congress has greatly increased, which will further promote the development of the stablecoin market. According to a recent forecast by Citibank, under an optimistic scenario, the market size of stablecoins will reach 3.7 trillion US dollars in 2030, becoming a key force affecting the global monetary and financial landscape.

However, there are still six major misunderstandings about stablecoins in China: stablecoins conflict with central bank digital currencies, stablecoins will increase the risk of illegal financial activities. These misunderstandings involve not only the functional positioning and stability attributes of stablecoins, but also the relationship between stablecoins and central bank digital currencies, and the impact of stablecoins on monetary sovereignty, currency internationalization and illegal financial activities, resulting in a lack of policy consensus on the development of offshore or onshore RMB stablecoins.

Next, we should clarify these misunderstandings as soon as possible, fully and objectively understand the functional attributes and strategic value of stablecoins, steadily promote the development of offshore RMB stablecoins, lay the foundation for the development of domestic RMB stablecoins, and provide a new engine for RMB internationalization.

Since the second half of 2023, stablecoins have entered a rapid growth track. The current market size has exceeded US$230 billion, with more than 250 million active accounts. It has rapidly integrated with traditional payment institutions, banking systems, etc., and has become a trend force for global financial innovation and development (see the previous analysis article "Trends and Prospects of Accelerated Integration of Cryptocurrency and Financial System" for details). At the same time, countries have taken advantage of the situation and actively supported the development of their own stablecoins. The European Union, Japan, Singapore, the United Arab Emirates, Hong Kong, China and other countries and regions have issued bills to regulate the innovative development of stablecoins. Since 2025, more than 10 major countries such as the United Kingdom, Australia, and South Korea have also announced relevant legislative plans. The market recognition and policy recognition of stablecoins around the world are rapidly increasing. In particular, the US "GENIUS Act" was recently passed by the Senate, and the probability of its final passage by Congress has greatly increased, which will further promote the development of the stablecoin market. According to a recent forecast by Citibank, under an optimistic scenario, the market size of stablecoins will reach 3.7 trillion US dollars in 2030, becoming a key force affecting the global monetary and financial landscape.

However, there are still many misunderstandings about stablecoins in China, which involve the functional positioning and stability attributes of stablecoins, the relationship between stablecoins and central bank digital currencies, and the impact of stablecoins on monetary sovereignty, currency internationalization and illegal financial activities, resulting in a lack of policy consensus on the development of offshore or onshore RMB stablecoins. Next, we should clarify these misunderstandings as soon as possible, fully and objectively understand the functional attributes and strategic value of stablecoins, steadily promote the development of offshore RMB stablecoins, lay the foundation for the development of domestic RMB stablecoins, and provide a new engine for the internationalization of RMB.

Misunderstanding 1: Equating stablecoins with general crypto assets

In the discussion on stablecoins, some views generally equate stablecoins with cryptocurrencies, believing that stablecoins are completely decentralized, highly volatile in price, lack value support, and are too risky. From the perspective of conceptual definition, cryptocurrency is a value expressed in digital form recorded using distributed ledger technology or other similar technologies, which gives holders the power and economic rights to own and use it. However, there are many types of cryptocurrencies, and stablecoins are a relatively special type. In terms of functional attributes and governance mechanisms, they are very different from general cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin.

From the perspective of functional attributes, this understanding lacks a structural understanding of crypto assets. Specifically, crypto assets include five specific types: central bank digital currencies, stablecoins (mainly stablecoins backed by fiat currencies), tokenized financial products and real-world assets (RWA), tokens not backed by off-chain assets (Bitcoin, Ethereum), and meme coins (Trumpcoin, Dogecoin). Among them, stablecoins, especially fiat-backed stablecoins, have both the stability and credibility of legal tender and the advantages of decentralization, globality, transparency, and high efficiency that blockchain brings to crypto assets. Historically, although stablecoins have experienced moments when their value fell below the promised face value and some risk events, they are generally stable, and with the improvement of the issuance management mechanism and the regulatory systems of various countries, the stability of the value of stablecoins is getting higher and higher.

From the perspective of transaction governance, this understanding also does not analyze the technical differences behind stablecoins. The issuance and trading of crypto assets such as Bitcoin and Ethereum rely on consensus algorithms such as Proof of Work (PoW) and Proof of Stake (PoS). They are completely decentralized, and the price is completely determined by both supply and demand in the market. However, stablecoins such as USDC and USDT are mostly issued by issuing institutions in a centralized manner (decentralized stablecoins account for a small proportion and are managed by protocols and smart contracts). The value is proved by the issuer's asset reserves (information disclosure and audit reports of the assets supporting the stablecoins, etc.). The issuer reserves the right to freeze abnormal accounts and adjust the parameters of smart contracts, which has semi-centralized governance characteristics. For example, the United States' GENIUS Act requires that stablecoin issuers have the technical ability to comply with legal orders to seize, freeze, destroy or prevent the transfer of issued stablecoins.

It is precisely because of the substantial differences between stablecoins and narrow crypto assets such as Bitcoin that the European Union, Japan, Singapore, the United Arab Emirates, Hong Kong, China, and the United States, which is formulating stablecoin and crypto asset bills, have all recognized general crypto assets as financial assets (such as securities), and stablecoins as payment tools (payment stablecoins), and have formulated or applied completely different regulatory laws.

Misconception 2: The value of stablecoins is not stable

In the history of development, stablecoins have experienced several risk events of value decoupling, such as the price of the US dollar stablecoin USDT fell to US$0.92 in April 2017, the algorithmic stablecoin TerraUSD (UST) collapsed in May 2022, and the price of the US dollar stablecoin USDC plummeted to below US$0.87 in 2023 due to the collapse of Silicon Valley Bank (at that time, USDC had US$3.3 billion of its approximately US$40 billion reserves deposited in Silicon Valley Bank). The prices of other smaller stablecoins also often fell below the promised value. In this regard, some people believe that stablecoins are not stable. Behind this view is the lack of understanding of the stablecoin stabilization mechanism and reserve asset management.

First of all, it is necessary to objectively understand the different types and stability performance of stablecoins. According to the value support behind stablecoins, stablecoins can be divided into four categories: legal currency-backed stablecoins (such as USDC, USDT), cryptocurrency-backed stablecoins (such as DAI), physical-backed stablecoins such as gold, silver and commodities (such as PAXG), and algorithmic stablecoins. In terms of price stability, algorithmic stablecoins that lack asset support have the lowest price, followed by cryptocurrency stability, and legal currency stablecoins and physical stablecoins have the highest price. At present, the stablecoins with the largest issuance and trading volume are legal currency stablecoins, accounting for more than 95% of the market. In this regard, most stablecoins are indeed backed by legal currency or assets, and are stable. Algorithmic stablecoins are relatively unstable. For this reason, in the regulatory laws and regulations of various countries, including the United States' GENIUS Act, algorithmic stablecoins are not included in the scope of regulatory recognition.

Secondly, stablecoin issuers are constantly improving the transparency and stability of reserve assets. The transparency of the largest stablecoin USDT has always been controversial. Recently, with the formulation and implementation of regulatory policies in various countries, they have also hired chief financial officers and announced the hiring of global accounting firms to conduct standardized audits of their reserve assets, taking a big step forward in transparency. The second largest stablecoin USDC has always been an industry model in terms of transparency and compliance. Its issuer Circle undergoes a monthly review of reserve assets by an independent auditing agency and discloses the structural status of reserve assets every week. In addition, Circle is also advocating the construction of a "Token Capital Adequacy Framework" (TCAF), using a dynamic risk-sensitive model, starting with stress testing reserves and stakeholder opinions, while considering technical risks such as blockchain network performance and network security, exceeding the capital adequacy ratio requirements for banks set by Basel III. The transparency, compliance, and stability mechanism construction of the two leading stablecoin issuers has been followed by the entire stablecoin market.

In addition, the regulatory mechanisms for the operation and management of stablecoin issuers in various countries are also being improved at an accelerated pace. Since 2022, countries and regions such as Japan, the European Union, the United Arab Emirates, Singapore, and Hong Kong, China have successively issued stablecoin regulatory bills, all of which have made clear requirements for stablecoin issuers in terms of license access, business management (involving the issuer's business scope, corporate governance, capital, liquidity and risk management, etc.), reserve asset investment and customer repayment, anti-money laundering and anti-terrorist financing, etc. The regulatory framework for stablecoin issuance and trading has become increasingly clear and complete. The United States' GENIUS Act sets targeted capital, liquidity and risk management requirements for stablecoin issuers, and requires issuers to submit monthly liquidity reports and reserve composition reports certified by the CEO and CFO, and be audited annually. The improvement and implementation of the regulatory framework provides additional protection for the stability of stablecoins.

Misconception 3: There is a conflict between stablecoins and central bank digital currencies

Fiat stablecoins are tokenized fiat currencies promoted by market institutions. After issuance, they can be mainly used for transaction settlement of crypto assets and physical cross-border trade payments, and transactions are decentralized; while central bank digital currencies are tokenized fiat currencies launched by central banks of various countries, and the overall issuance and management is still based on a centralized database architecture. For this reason, some people believe that the use of stablecoins will inhibit the use of central bank digital currencies, and the "decentralized" characteristics of stablecoins conflict with the centralized management of payment systems by central banks of various countries. This view is an insufficient understanding of the complementarity and coexistence of the two.

There is an obvious complementarity in the use scenarios of fiat stablecoins and central bank digital currencies. The retail central bank digital currencies (such as digital RMB) launched by various countries are mainly used in the fields of domestic life payment, catering services, transportation, shopping, government services, etc. Some countries have launched wholesale central bank digital currencies for settlement between financial institutions. In the future, stablecoins will be mainly used in cross-border B2B settlement, offshore market circulation, crypto asset trading, and DeFi ecology. Transactions are decentralized and "payment is settlement" (simultaneous delivery of transaction payments PvP), which has obvious advantages over the current bank cross-border payment and settlement system in terms of cost and efficiency of cross-border payments. Existing bank cross-border remittances usually take up to 5 working days to settle, and the average cost rate of cross-border remittances is around 6.35% (World Bank data), but cross-border payments based on stablecoins are basically settled in real time, and the longest settlement time will not exceed 1 hour. The average cost of sending stablecoins on many high-performance blockchains is less than US$1. More importantly, the goal and mission of central banks in various countries is to maintain price stability and steady and rapid economic growth through monetary policy regulation, rather than to maximize the issuance and circulation of central bank currency (central bank digital currency).

At the same time, the decentralized characteristics of stablecoins and the management model of central bank digital currency can also coexist. In terms of technical architecture, my country's current digital RMB has layered the systems behind it. The core system adopts a centralized traditional architecture to achieve high performance. At the same time, a distributed ledger is used to ensure the consistency of the ownership information of the central bank's digital currency between the central bank and commercial banks in the registration of rights confirmation, which is to explore the coordination of centralized management and decentralized ledgers. In terms of business operations, in October 2022, the Hong Kong Monetary Authority and the BIS Innovation Center jointly launched the Aurum project, a digital currency system that operates a hybrid of central bank digital currency and stablecoins. Two different types of tokens were established at the wholesale level - intermediary CBDC (direct liabilities of the central bank) and stablecoins supported by CBDC (liabilities of the issuing institution, whose supporting assets CBDC are held by the central bank). It is also actively exploring the model of co-operation of decentralized trading stablecoins and centralized management of central bank digital currencies.

In addition, the current policy orientation of major countries has shifted to supporting the joint development of stablecoins and central bank digital currencies. On the one hand, according to the survey statistics of the Bank for International Settlements (BIS) in 2024, the current interest of countries around the world in central bank digital currencies has increased significantly, and the number of countries and regions exploring experiments has reached about 100. On the other hand, countries and regions such as the European Union, the United Arab Emirates, Singapore, and Hong Kong, China have issued regulatory regulations on stablecoins and cryptocurrencies, and the legislative process of major countries in the world to support the compliance and innovative development of stablecoins and cryptocurrencies in 2025 has accelerated significantly. The United Kingdom, Australia, Japan, South Korea, Turkey, Argentina, Nigeria and other countries have announced plans to formulate stablecoin and cryptocurrency bills. It can be seen that the main policy line of various countries has shifted to supporting the integrated development of stablecoins, cryptocurrencies and central bank digital currencies.

Misunderstanding 4: Stablecoins undermine domestic monetary sovereignty

Stablecoin transactions have significant decentralized and global attributes. Some views believe that the development of stablecoins will lead to the substitution of domestic sovereign currencies and weaken the central bank's ability to regulate monetary policy. This view is an inadequate understanding of the use and management of stablecoins and monetary policy regulation. Whether from the development history or policy practice, the concerns behind it do not exist, or can be eliminated through institutional design.

For monetary sovereignty substitution, it can be solved by restricting the domestic use of stablecoins and the management of stablecoin reserve assets. For some countries, especially small countries, the large-scale use of other countries' legal currency stablecoins in their own countries will indeed have a crowding-out effect on the circulation and use of their own currencies. However, in the process of issuing stablecoins, in order to limit the impact of foreign currency stablecoins such as US dollar stablecoins on the circulation and payment of domestic local currencies, the regulatory laws of countries and regions such as the European Union and the United Arab Emirates have made targeted arrangements, such as restricting or prohibiting the use of foreign currency stablecoins in domestic transaction payments. At the same time, for the management of stablecoin reserve assets, the common regulatory requirements of various countries are that the issuers of local currency stablecoins need to entrust the reserve funds to financial institutions in their own countries and regions and invest in assets denominated in local currencies. For example, the US "GENIUS Act" clearly requires that the investment scope of stablecoin reserves is mainly US dollar assets, including US dollar cash, short-term US Treasury bonds, Federal Reserve notes, money market funds, and central bank deposits. This not only avoids the risk of currency substitution, but also reduces the risk of monetary sovereignty substitution.

The impact of monetary policy regulation can be solved by gradually developing stablecoins and central bank open market operations. In terms of issuance, in order to alleviate the impact of the rapid development of stablecoins on the existing monetary system and monetary policy in a short period of time, the EU Crypto-Asset Market Regulation Act (MiCA) requires that the daily trading volume of a single asset reference token (ART) and electronic money token (EMT) shall not exceed 5 million euros, and when the market value of ART and EMT exceeds 500 million euros, the issuer must report to the regulator and meet additional requirements. In terms of use, the "offshore first, then onshore and finally domestic" promotion path can be adopted (such as the UAE), first limit the use of "qualified people" and then gradually open up the use of people, first limit local use scenarios such as financial transaction payments and then continue to open up use scenarios. In addition, from the development history of the European dollar and the petrodollar, the US dollar is still affected by the monetary policy regulation of the Federal Reserve after globalization, and the reserve assets behind the legal currency stablecoin are still denominated in local currency and traded in the country, and are still affected by the monetary policy regulation of the central bank of the country, and the central bank can also include local currency stablecoins in open market operations.

Misconception 5: Stablecoins are not conducive to the internationalization of local currencies

This view is mainly aimed at the internationalization of the RMB. At present, my country is actively promoting the development of the RMB Cross-Border Payment System (CIPS system), and at the same time promoting the integration of CIPS and the multilateral central bank digital currency bridge (mBridge) project as an important channel to promote the internationalization of the RMB. Currently, the participating institutions of CIPS have covered 185 countries and regions. For this reason, some people believe that the issuance and trading of RMB stablecoins are not conducive to the development of the CIPS system and the promotion of RMB internationalization. However, this view is specious and does not accurately understand the role of stablecoins in promoting currency internationalization.

On the one hand, the breakthrough development of RMB internationalization requires the use of RMB stablecoins as a new engine. In recent years, with the support of promoting CIPS, expanding local currency swap agreements, and increasing the use of RMB in Belt and Road investment and trade, the share of RMB in global payments has risen to fourth place, but the market share (3.75% in December 2024) is far behind the US dollar (49.12%), especially the use of RMB in international payments involving non-Chinese companies is relatively small. Stablecoins have a natural global attribute. As of May 2025, the transaction volume of stablecoins in the past 12 months reached 7 trillion US dollars (33.2 trillion US dollars before adjustment), and the number of transactions reached 14 trillion (51 trillion before adjustment). The transaction volume in 2024 exceeded the total payment scale of VISA and MasterCard, and gradually became the mainstream method of cross-border transaction payment. Actively promoting the use of RMB stablecoins in cross-border trade and international settlement will be an important starting point for the internationalization of RMB, and it does not conflict with promoting the internationalization of RMB through the expansion of CIPS applications.

At the same time, the development of RMB stablecoins will help reduce the uncertainty faced by the central bank's digital currency bridge. Although the digital RMB can be used for cross-border payments through the multilateral digital currency bridge, improving the internationalization level of the RMB, it has entered the minimum viable product (MVP) stage in June 2024. However, with the BIS withdrawing from the "Digital Currency Bridge" project and turning to support the Agora project led by the US and European central banks, there is a certain degree of uncertainty in the development prospects of the "Digital Currency Bridge". Increasing the proportion of RMB in international payment settlements through RMB stablecoins will help make up for the shortcomings of insufficient penetration of digital RMB in offshore scenarios and the uncertainties faced by the development and promotion of the central bank's digital currency bridge.

Misconception 6: Stablecoins will increase the risk of illegal financial activities

Stablecoins are issued and traded based on blockchains, and have the characteristics of decentralization, globalization, anonymity, and irrevocability of transactions. In addition, the chain bridge technology strengthens the interconnection of different blockchains, making it easier for money launderers to hide their identities and sources of funds. For this reason, some people believe that stablecoins will increase the risks of illegal financial activities such as money laundering and capital flight. These understandings are somewhat outdated and have not kept up with the development of anti-money laundering technology in the field of cryptocurrency, as well as the development of regulatory systems such as anti-money laundering in the field of cryptocurrency.

Blockchain technology can also be used to monitor the flow of stablecoin funds. Since the launch of cryptocurrency, institutions and experts have been studying and designing expression patterns for encrypted assets to record the process information of digital currency transfer transactions in encrypted digital currency expressions. At the same time, as early as 2019, BIS research pointed out that for stablecoin and cryptocurrency transactions based on blockchain and distributed ledgers, financial regulators can apply blockchain and distributed ledger technology to financial supervision and implement "embedded supervision" for stablecoins and cryptocurrencies. At the same time, some countries are also exploring and promoting blockchain key node supervision and governance community supervision.

In addition, some blockchain technology companies have developed multi-node data encryption processing technology. While ensuring capital security, they use distributed data management systems to conduct real-time statistics and analysis on the specific flow and changes of capital, track the process of funds from source to destination, and reveal the source, destination and connection of funds. These technologies can be fully used in the anti-money laundering and illegal financial activities supervision of stablecoin transactions. For example, in August 2024, TRON, stablecoin USDT and TRM jointly established the T3 Financial Crime Prevention Alliance (T3 FCU), which cooperated with law enforcement agencies in various countries to freeze more than $130 million in cryptocurrency illegal activities in 2024. The global anti-money laundering and illegal financial activities supervision system is also rapidly improving. In response to the potential money laundering risks in stablecoin and crypto asset transactions, the Global Financial Action Task Force (FATF) updated the "International Standards for Combating Money Laundering, Terrorist Financing and Proliferation Financing: FATF Recommendations", explicitly incorporating stablecoin and cryptocurrency (virtual asset) activities and service providers (VASP) into the international standards for anti-money laundering and counter-terrorist financing, setting the starting point for customer due diligence on one-time virtual asset transactions at 1,000 euros/dollars, and requiring the extension of the application of the "Travel Rule" to virtual asset products and services. At the same time, the European Union, Japan, Singapore, and Hong Kong, China have also proposed targeted anti-money laundering and anti-terrorist financing regulatory programs for cryptocurrency trading services. For example, the EU's "Fund Transfer Regulation" requires that any amount of cryptocurrency transfers between cryptocurrency service accounts must follow the "travel rule." The US "GENIUS Act" also puts forward specific anti-money laundering compliance requirements for stablecoin transactions, and requires issuers to have the technical capabilities to seize, freeze, and prevent illegal transactions of stablecoins.