The Challenges of Stablecoins and the Opportunities of Digital RMB

Abstract

The rapid expansion of stablecoins has impacted the monetary sovereignty, financial stability, regulatory effectiveness and monetary policy transmission of global central banks. Major countries and regions around the world, including the United States, the European Union, and Hong Kong, have accelerated legislation to compete for dominance in digital finance. China should maintain strategic focus and rely on Hong Kong to explore a two-tier governance model of "offshore pilot-onshore control." Based on the principles of sufficient reserves and licensed operations, it will build a digital firewall; using the "Belt and Road" commodities and supply chain finance as scenarios, it will create a RMB-denominated asset network; with layered controllable technology, smart contract security, and high system concurrency as innovative fulcrums, it will promote the global implementation of the digital RMB; through the output of infrastructure and rules such as mBridge, it will enhance the international competitiveness of the RMB and ultimately gain the initiative in the global digital financial competition. In recent years, the topic of stablecoins has garnered widespread attention within the industry. As a bridge connecting traditional finance and the crypto ecosystem, stablecoins are reshaping the global payments landscape. However, their cross-border payment efficiency is accompanied by systemic risks, drawing increased attention from global regulators. Currently, the United States, Hong Kong, and other regions are accelerating legislation to establish regulatory frameworks. Faced with the ongoing struggle between technological advancement and monetary sovereignty, deepening stablecoin research and promoting the mature application of central bank data currencies are key to my country's ability to seize the initiative in digital financial transformation. I. The Concept of Stablecoins and Global Development Status Stablecoins are cryptocurrencies that are anchored to fiat currencies, precious metals, or other assets and designed to maintain stable value. Its core mechanism is to ensure relative currency stability through a 1:1 asset reserve or algorithmic regulation, thereby enabling efficient and low-cost payment and settlement functions within the blockchain environment. As a crucial bridge between the traditional financial system and decentralized finance (DeFi), stablecoins have rapidly grown globally in recent years, becoming a crucial tool in cross-border payments, digital asset trading, and other fields. The global stablecoin market has experienced explosive growth in recent years. US dollar-denominated stablecoins, such as USDT and USDC, leverage public blockchain infrastructure such as Ethereum and Solana and have been widely used in scenarios such as crypto asset trading, cross-border remittances, and smart contract settlement. It is reported that by the end of June 2025, the total global stablecoin market value was approximately $260 billion, with US dollar-denominated stablecoins accounting for over 95%. Major countries have strengthened the regulation and inclusion of stablecoins. The United States passed the GENIUS Act, promoting a deeper integration of dollar-denominated stablecoins with the Treasury bond system and strengthening their dominant position in global digital finance. The European Union issued the Markets in Crypto-Assets (MiCA) Regulation, imposing trading limits on non-euro stablecoins to prevent the risk of erosion of financial sovereignty. Hong Kong, China, pioneered a multi-currency stablecoin regulatory sandbox, allowing Hong Kong dollar and offshore RMB stablecoins to undergo compliance pilot programs. Overall, stablecoins have become a new frontier in global fintech competition. Their development not only concerns technological innovation but also profoundly impacts the future of the international monetary system. The rapid expansion of stablecoins, while improving payment efficiency, also poses systemic challenges to the traditional central bank monetary system. This impact primarily manifests itself in four areas: monetary sovereignty, financial stability, regulatory effectiveness, and monetary policy transmission. First, it erodes national monetary sovereignty and threatens the status of legal tender. Stablecoins are essentially quasi-currency instruments issued by private institutions. The wider their circulation, the stronger their substitution effect on legal tender. In particular, in the cross-border payment sector, US dollar stablecoins, with their efficiency and low cost, have gradually replaced some US dollar settlement functions within the SWIFT system. This "digital dollarization" trend enables the United States to expand US dollar liquidity globally without relying on traditional trade surpluses or capital outflows, further consolidating its dominant currency position. For developing countries, if residents and businesses widely use foreign currency stablecoins for daily transactions and asset allocation, it will lead to a decline in the use of their own currencies and weaken the central bank's ability to control currency issuance. If large-scale "de-monetization" occurs, countries will lose the ability to regulate their economies through monetary policy, and their financial sovereignty will face serious challenges. Second, it disrupts the money creation mechanism and exacerbates financial system instability. In the traditional banking system, money creation relies on the reserve requirement system and credit expansion. The central bank can effectively regulate the money supply through measures such as adjusting the reserve requirement ratio and open market operations. However, the operating mechanism of stablecoins bypasses this process. When users exchange fiat currency for stablecoins, this capital exits the commercial banking system and no longer participates in the money multiplier effect, resulting in an "extracorporeal circulation" of base money. More importantly, stablecoin issuers invest their reserve assets in financial instruments such as U.S. Treasury bonds and commercial paper, creating a new credit creation chain. This process is beyond the supervision of the central bank and may trigger asset bubbles and systemic risks. For example, the 2022 TerraUSD (UST) crash, caused by flawed algorithmic mechanisms and market panic, not only caused significant losses to investors but also impacted the entire crypto market, exposing the vulnerability of stablecoins in the absence of effective regulation. Third, it interferes with the transmission of monetary policy and reduces its effectiveness. The effectiveness of central bank monetary policy relies on precise control of interest rates, credit, and money supply. However, the widespread use of stablecoins may weaken this transmission mechanism. When businesses and individuals increasingly use stablecoins for financing and investment, the importance of traditional bank credit channels declines, and the impact of central banks adjusting benchmark interest rates on the real economy is diluted. Especially during periods of high inflation or economic crises, the public may accelerate the conversion of their local currencies to US dollar stablecoins for value preservation, creating a "currency substitution" effect, leading to domestic liquidity shortages, forcing central banks to adopt more aggressive policies, and exacerbating economic volatility. Furthermore, the programmable nature of stablecoins' smart contracts enables automated payment and interest distribution functions, potentially spawning new financial products and services, further complicating the financial ecosystem and increasing the difficulty of macroprudential management. Fourth, they weaken regulatory oversight and facilitate illegal financial activities. Despite claims of "compliant operations," transactions in mainstream stablecoins still exhibit pseudo-anonymity. Users only need a single blockchain address to transfer funds globally. While transaction records are publicly available, identity verification is difficult. Even if compliant stablecoins strictly enforce Know Your Customer (KYC) standards during issuance, risk management during the transaction process falls to the private sector, which challenges both resource commitment and initiative, making it difficult for the private sector to effectively implement these policies. This facilitates illegal activities such as money laundering, terrorist financing, and tax evasion. In contrast, while third-party payment platforms like Alipay and WeChat Pay also involve capital flows, all transactions are connected to the central bank's clearing systems (NetsUnion/UnionPay) through a "disconnected" approach, allowing for full monitoring of both capital and information flows. The unique characteristics of stablecoins make them difficult for a single regulatory body to effectively regulate, especially in cross-border transactions, where regulatory arbitrage is a prominent phenomenon. Furthermore, the rapid and large-scale cross-border flows of stablecoins can easily trigger abnormal short-term capital fluctuations, complicate foreign exchange management, and threaten national financial security. In short, while stablecoins improve payment efficiency on a technical level, China's well-developed financial infrastructure and third-party payment platforms with similar stablecoin functions make their payment efficiency advantages insignificant in China. Furthermore, the potential financial risks inherent in these platforms should not be ignored. They are not merely a technological tool but also a vehicle for the redistribution of financial power. If allowed to expand unchecked, they will undermine the foundations of the central bank's monetary system and threaten national financial sovereignty and stability. Therefore, it is imperative to strategically examine the development of stablecoins, proactively address challenges, steadily promote the global implementation of central bank digital currencies (CBDCs), represented by the digital RMB, and build a secure, efficient, and controllable new international payment system. Third, Closely Monitor the Progress of Stablecoins and Steadily Promote the Global Implementation of the Digital RMB. Against the backdrop of the accelerating global digital economy, stablecoins, as emerging financial instruments, are reshaping the international monetary landscape at an unprecedented pace. Faced with this trend, China cannot react passively. Instead, it must maintain a high degree of strategic awareness and closely monitor the technological evolution, market dynamics, and regulatory trends of stablecoins. At the same time, it must unwaveringly advance the research and development, pilot programs, and internationalization of the digital RMB (eCNY). This is not only an inevitable choice to safeguard national financial sovereignty, but also a strategic move to seize the opportunities presented by the new round of scientific and technological revolution and industrial transformation and advance the internationalization of the RMB to a higher level. (I) Institutional Innovation: Establishing a Two-Tier Governance Framework of "Offshore Experimentation and Onshore Control" Faced with the regulatory challenges posed by stablecoins, China should adhere to the principles of "giving equal importance to development and security, and unifying innovation and regulation" to build a digital currency governance model with Chinese characteristics. The key lies in designing an institutional framework that can both stimulate market vitality and maintain a bottom line for risk. Drawing on Hong Kong's successful experience in financial openness and risk prevention and control, we can explore the establishment of a two-tier governance system of "offshore experimentation and onshore control." 1. Using Hong Kong as an offshore pilot platform, implement a "negative list + regulatory sandbox" mechanism. As an international financial center with a mature legal system, open capital markets, and a highly international business environment, Hong Kong is an ideal testing ground for digital currency innovation. It is recommended that, leveraging the Guangdong-Hong Kong-Macao Greater Bay Area strategy, Hong Kong be developed into an offshore innovation hub for the digital RMB and compliant stablecoins. Within this framework, a "negative list" management model will be implemented, clearly prohibiting certain activities (such as unauthorized securitization, leveraged trading, and anonymous payments), while allowing market participants free exploration outside of the list. At the same time, a "digital currency regulatory sandbox" will be established to encourage financial institutions and technology companies to conduct innovative businesses such as supply chain finance, cross-border trade settlement, and digital asset tokenization (RWA) based on offshore RMB stablecoins in a controlled environment. Regulators can monitor the risk exposure of pilot projects in real time and adjust rules promptly to ensure that innovation does not overstep boundaries and risks do not spill over. 2. Establish a "digital firewall" to safeguard monetary sovereignty and financial security While promoting offshore innovation, it is imperative to strengthen the "onshore control" defense line to ensure the central bank's ultimate control over currency issuance and clearing. A "separate accounting system" can be established to physically isolate offshore digital RMB from onshore funding pools, enabling independent management of capital and information flows. All cross-border transactions must be settled through a central bank-authorized digital currency bridge (such as mBridge) to ensure that every capital flow remains within regulatory oversight. Furthermore, anti-money laundering (AML), counter-terrorism financing (CFT), and know-your-customer (KYC) rules should be improved, requiring all participants to strictly fulfill their compliance obligations. The "digital firewall" mechanism can support the flexible application of the digital RMB in the international market while effectively preventing risks such as capital flight and illegal transactions, achieving a dynamic balance between openness and security. 3. Promote the "sufficient reserves + licensed operation" principle and lead international rule-making. Currently, global regulatory standards for stablecoins are not unified, leaving significant room for policy arbitrage. China should actively participate in international rule-making and promote a fairer and more transparent global digital currency governance system. Drawing on the core principles of Hong Kong's Stablecoin Ordinance, China could advocate for the "sufficient reserves + licensed operation" principle, requiring all stablecoin issuers to hold 100% of highly liquid assets as reserves and be subject to continuous oversight by financial regulators. This standard will not only help strengthen market confidence and prevent systemic risks similar to the UST collapse, but also help maintain the authority of sovereign currencies. Actively speaking out through multilateral platforms (such as the IMF, BIS, and FSB) will promote this principle as an internationally accepted norm and enhance my country's voice in global financial governance. (II) Ecosystem Construction: Promoting the Coordinated Development of RMB Internationalization through Scenario Expansion Competition in stablecoins is ultimately a competition for application scenarios. Whoever can first achieve large-scale application in key areas will dominate the future digital financial landscape. Therefore, the global implementation of the digital RMB must focus on scenario development and build an open, inclusive, mutually beneficial and win-win ecosystem. 1. Focus on the Belt and Road Initiative and Build a Network of RMB-Denominated Assets. The Belt and Road Initiative, which covers over 60% of the world's population and 30% of its GDP, is a key strategic pillar for promoting the internationalization of the RMB. We recommend building a cross-border payment infrastructure based on the digital RMB, working with countries along the route, and prioritizing the promotion of RMB-denominated settlement in commodity trade, such as energy, minerals, and infrastructure construction. For example, we could explore the use of digital RMB for project payment and profit distribution in major projects such as the Central Asian natural gas pipeline and Southeast Asian photovoltaic power plants. Furthermore, we support domestic financial institutions in establishing digital RMB wallet service points overseas to provide local businesses with convenient payment channels. By deeply integrating digital RMB into high-frequency, high-value scenarios, we will gradually establish a regional currency circulation system centered on the RMB, enhancing its international appeal. 2. Develop supply chain finance and enhance service capabilities for the real economy. The programmability of the digital RMB offers broad potential for its application in supply chain finance. Smart contract technology can be used to automatically confirm, split, and transfer accounts receivable, addressing the difficulties and high costs of financing for small and medium-sized enterprises. For example, within the automotive manufacturing industry chain, core enterprises can pay first-tier suppliers with digital RMB accounts payable vouchers (similar to "digital bills"). The latter can then split the vouchers into multiple instalments as needed and pay them to second- and third-tier suppliers until final settlement is completed. The entire process is transparent and traceable, significantly reducing credit risk and operational costs. If this model can be replicated globally, it will significantly increase the RMB's penetration in international trade and production networks, promoting its advancement from a "settlement currency" to a "financing currency" and a "reserve currency." 3. Build a "CBDC + Compliant Stablecoin" Dual-Driven Ecosystem While upholding the dominant position of the digital RMB, regulated, compliant stablecoins can be appropriately introduced as a supplementary force, forming a pattern of coordinated development between the "national team" and "market forces." For example, qualified financial institutions could be allowed to issue "stable tokens" based on the digital RMB for use in specific scenarios, such as high-frequency, small-value payments or DeFi applications. Although these tokens are issued by private institutions, their underlying assets are fully backed by the digital RMB, and transaction records are synchronized to the central bank system in real time to ensure regulatory control. This "hybrid model" can both unleash the innovative vitality of market mechanisms and safeguard the integrity of monetary sovereignty, injecting a more diversified service offering into the digital RMB ecosystem.

(III) Technological Innovation: Achieving the Organic Unity of Controllable Interoperability and Security

Technology is the core battlefield of digital currency competition. For the digital RMB to achieve global leadership, it must continue to break through key technical bottlenecks while ensuring security and controllability, especially in interoperability, privacy protection and system performance.

1. Develop a "layered and controllable" technical architecture to balance openness and regulation

To meet the challenges of public chain stablecoins, the digital RMB can learn from the practices of the Hong Kong Monetary Authority's Ensemble Sandbox and build a "layered and controllable" distributed ledger technology (DLT) architecture. At the foundational layer, a consortium or hybrid chain model will be adopted, with authorized regulatory nodes established to enable real-time monitoring of transaction data and risk warnings. At the application layer, open APIs will allow third-party developers to develop various financial services based on the digital RMB, such as robo-advisory, automated wealth management, and cross-border remittances. This design of "controllable underlying infrastructure and open applications" ensures both financial security and innovation. Furthermore, the application of cryptographic technologies such as zero-knowledge proofs (ZKPs) to large-value transactions can be explored, protecting user privacy while meeting anti-money laundering compliance requirements and achieving "regulatory anonymity." 2. Strengthening Smart Contract Security and Preventing Technical Risks Smart contracts are key to enabling automated and intelligent services for the digital RMB. However, once deployed, they are difficult to modify, and vulnerabilities can cause irreparable losses. Therefore, a rigorous smart contract auditing and testing mechanism must be established. The central bank could take the lead, collaborating with universities, research institutions, and security companies to develop unified smart contract development specifications and security standards. All live contracts must undergo multiple rounds of formal verification and stress testing to ensure logical correctness and the absence of backdoor vulnerabilities. At the same time, a "circuit breaker mechanism" should be established. When the system detects abnormal transaction behavior (such as large-scale fund transfers or high-frequency arbitrage), it will automatically suspend contract execution, buying time for human intervention and minimizing technical risks. 3. Improve system performance to meet high concurrency requirements. To support large-scale global adoption, the digital RMB must possess extremely high transaction processing capabilities. Currently, the peak processing capacity of the digital RMB pilot system has reached hundreds of thousands of transactions per second, reaching the level of international card organizations such as Visa and Mastercard. Going forward, we should continue to optimize consensus algorithms, data storage, and network transmission technologies to further improve system throughput and responsiveness. Especially in cross-border payment scenarios, it is necessary to ensure the coordinated efficiency of the digital currency bridges of multiple central banks to achieve "second-level account arrival and zero-delay settlement." Through continuous technological iteration, the digital RMB will not only be comparable to stablecoins in performance, but will even have significant advantages in security, stability, and regulatory compliance. (IV) Global Competition and Cooperation: A Strategic Layout for Coordinating Financial Security and Order The global implementation of the digital RMB is not only a technological competition, but also a game of national strategy. China should formulate a systematic response strategy from the perspective of maintaining national financial security and reshaping the global financial order. 1. Strengthen the voice in rule-making and promote the establishment of fair and transparent international standards. Currently, the international community is still in the exploratory stage regarding the classification and regulatory framework for CBDCs and stablecoins. China should actively participate in technical working groups of international organizations such as the IMF and BIS and proactively propose Chinese solutions. For example, China could advocate for the establishment of a "Central Bank Digital Currency Interoperability Agreement" to clarify the technical standards, data formats, and clearing rules for CBDCs in cross-border payments, thereby avoiding the formation of a new "digital divide." At the same time, China should promote the inclusion of the "digital RMB model" in the global CBDC best practice case library, share my country's experience with developing countries, and enhance its voice and influence in international financial governance.

2. Improve payment infrastructure and build a new network with digital RMB as the core

Infrastructure is the cornerstone of currency internationalization. China should accelerate the construction and promotion of multilateral digital currency bridges such as mBridge to attract more central banks of countries (regions) to join. By connecting the payment systems of various countries, direct exchange of local currencies can be achieved, greatly reducing dependence on SWIFT and the US dollar clearing system. At the same time, domestic payment institutions are supported to jointly build a localized wallet service network with overseas partners to provide overseas users with a convenient digital RMB payment experience. Through the combination of "hard connectivity" and "soft connectivity", a new global payment network with digital RMB as the core node will be gradually built. 3. Focus on improving asset pricing power and enhancing the international competitiveness of the RMB The international status of a currency depends not only on payment convenience, but also on the attractiveness of the assets behind it. China should use the digital RMB to bind the huge domestic import demand and high-quality asset supply, and gradually form the habit of pricing in RMB. For example, the use of digital RMB settlement can be encouraged in the import of key commodities such as iron ore and crude oil, and financial products such as futures and bonds denominated in RMB can be launched to attract international investors to hold and trade. At the same time, support domestic enterprises to use digital RMB to carry out overseas investment and mergers and acquisitions, and increase the proportion of RMB used in global capital flows. Through the dual-wheel drive of "flow + assets", the international competitiveness of the RMB will be comprehensively enhanced. 4. Analysis and Clarification of Certain Misconceptions It is worth noting that, as the popularity of stablecoins has grown, some specious views have emerged in China, such as "The United States is using stablecoins to build Dollar Hegemony 4.0" and "China should embrace stablecoins to avoid falling behind." These views ignore the fundamental issue. The establishment of the Bretton Woods system stemmed from the United States' absolute superiority in gold, industry, and military, rather than simple financial innovation. Today, the United States faces a hollowing out of its real economy, high debt, and a shrinking technological lead. Its promotion of stablecoins is more of a remedial measure to compensate for the outdated traditional financial infrastructure. In contrast, China boasts the world's most complete industrial chain, the most advanced electronic payment system, and strong national credit. It is fully capable of achieving a higher level of financial independence through the digital RMB. Therefore, we must neither blindly reject technological innovation nor be misled by the myth of "financial omnipotence." Instead, we should prioritize the real economy, take our own initiative, and steadily advance the global implementation of the digital RMB. The rise of stablecoins presents both a challenge and an opportunity. It forces us to rethink the nature of money, the boundaries of finance, and the very meaning of national sovereignty. In this profound transformation of the future financial landscape, China cannot be absent, let alone silenced. With strategic resolve and a spirit of innovation, we must closely monitor the progress of stablecoins, conducting in-depth research into their technical logic, market mechanisms, and risk profiles. At the same time, we must unwaveringly advance the research, development, and internationalization of the digital RMB. We must strengthen security through institutional innovation, expand application scenarios through ecosystem development, enhance core competitiveness through technological innovation, and foster a favorable environment through international cooperation to ultimately achieve the robust global implementation of the digital RMB. Only in this way can we seize the initiative in the new round of scientific and technological revolution and industrial transformation and contribute Chinese wisdom and solutions to building a more equitable, inclusive and sustainable global financial system.