Author: Peng Wensheng, CICC Insights

Stablecoins are private currencies pegged to fiat currencies, and the operational model of dollar stablecoins is similar to the concept of narrow banking, where the issuer's liabilities (stablecoins) pay zero interest, while the safe assets that serve as redemption guarantees earn interest. The supply of stablecoins is highly elastic, and the significant increase in dollar interest rates in recent years has provided issuers with the incentive to increase supply, but the zero interest means that their circulation is primarily determined by demand. The reason demand-side participants are willing to forgo interest income is that stablecoins offer other conveniences, such as being used for cryptocurrency trading, and they have lower costs for cross-border payments compared to traditional banking payment systems, with regulatory arbitrage being an important aspect, and another possibility being their use as a tool to replace unstable currencies. Theoretically, these functions could also be fulfilled by stablecoins of other currencies, but the dollar, as the international reserve currency, has an incumbency advantage. Its established network and scale effects put stablecoins of other currencies at a disadvantage in competition with dollar stablecoins. This may explain why the European Central Bank advocates issuing a digital euro (central bank digital currency) rather than utilizing euro stablecoins to address the challenges posed by dollar stablecoins. For China, the first step should be to vigorously promote the use of third-party payment tools in cross-border payments. From an economic mechanism perspective, platforms like WeChat Pay and Alipay are similar to RMB stablecoins, having already formed a strong network and scale economy domestically, and compared to dollar stablecoins, RMB platform stablecoins have stronger economic attributes and weaker financial attributes, better leveraging China's scale advantages in manufacturing and finished goods trade. Secondly, central bank digital currency, as an exogenous force, is beneficial in countering the endogenous advantages of incumbent international currencies in market competition, such as establishing cross-border payment infrastructure through multilateral central bank digital currency cooperation. Furthermore, as a new payment technology and business model, the mechanisms of dollar stablecoins may have spillover effects that are not yet fully understood; completely denying them is not the optimal choice. Hong Kong can play a role as an international financial center and offshore RMB center by piloting RMB stablecoins.

Recently, developments in the digital currency space, especially the evolution of dollar stablecoins, have attracted attention. Since re-entering the White House, the Trump administration has made numerous statements regarding digital currencies, including the development of stablecoins pegged to the dollar, opposing the Federal Reserve's issuance of central bank digital currency, and advocating for the inclusion of cryptocurrencies like Bitcoin as reserve assets. Recently, U.S. Treasury Secretary Mnuchin stated at the White House's first digital asset summit that the U.S. "will maintain the dollar's status as the world's dominant reserve currency" and "will utilize stablecoins to achieve this goal."

Other countries and regions around the world have also responded. European Central Bank President Christine Lagarde recently emphasized the need to quickly establish a legislative framework to pave the way for a potential digital euro (central bank digital currency) to address the challenges posed by the rapid development of stablecoins and cryptocurrencies. Interestingly, she did not propose using euro stablecoins as a response. Hong Kong has passed the "Stablecoin Regulation Draft," which allows licensed institutions to issue stablecoins pegged to fiat currencies and sets relevant regulatory requirements.

Stablecoins are not only a hot topic of global concern but also an economic event that is actually happening, which may have significant implications for the global economy and financial landscape. This article attempts to analyze how to understand the economic logic of stablecoins and the implications for public policy.

1. What are stablecoins? What are they not?

Stablecoins are a type of cryptocurrency that is pegged to specific assets and aims to maintain relative price stability. Currently, dollar stablecoins backed by highly liquid assets (such as USDT and USDC) account for over 90% of the total market capitalization of all stablecoins, and this article discusses only these dollar stablecoins. The trading of stablecoins can be divided into primary and secondary markets. In the primary market, stablecoin issuers typically promise to redeem 1 stablecoin for 1 dollar, but there are high participation thresholds, generally allowing only institutional users to participate, and they must meet customer identity verification (KYC) requirements, with redemption also subject to processing delays. The secondary market is where market participants trade autonomously, and the price of stablecoins is influenced by supply and demand, sometimes deviating from the pegged price of 1 dollar. Stablecoins possess both technological and monetary characteristics, with several points worth noting.

(1) Digital technology enhances payment settlement efficiency, but does not achieve decentralization

In theory, stablecoins operate on a distributed ledger of blockchain, possessing decentralized attributes. At the same time, stablecoins can be embedded in smart contracts, supporting applications such as lending and trading in decentralized finance (DeFi), allowing for automatic execution without traditional financial intermediaries, thus achieving fast and low-cost settlements. However, in reality, the decentralization of stablecoins has certain limitations. For example, the issuing companies of USDT and USDC control the issuance and redemption of stablecoins and manage reserve funds, presenting certain centralized characteristics.

(2) From the holder's perspective, stablecoins are private currencies, not government currencies

According to the "Stablecoin Innovation and Guidance Act (GENIUS Act)" proposed in the U.S. in 2025 (draft), stablecoin issuers are prohibited from paying any form of interest to holders. At the same time, the act requires stablecoin issuers to hold no less than 1:1 high liquid assets as reserves. From a monetary attribute perspective, stablecoins are essentially a type of private currency based on the credit of the dollar and the credit of the issuing institution.

(3) From the issuer's perspective, the stablecoin model is similar to "narrow banking," not just liabilities

The operation of stablecoins is similar to the narrow banking model. Traditional banks adopt a "short-term debt, long-term investment" model, using short-term deposits to issue long-term loans, where maturity mismatches can lead to liquidity crises, as seen in historical bank panics and runs. The modern central banking system enhances financial stability through a multi-layered regulatory framework, including various liquidity tools, deposit insurance systems, capital liquidity requirements, and macroprudential policies. In contrast, stablecoins resemble the concept of narrow banking, where the core is to strictly limit the scope of business, allowing only the holding of low-risk, high-liquid assets such as cash and short-term government bonds. By maintaining sufficient or even excess assets, they uphold their redemption guarantees for deposits, avoiding crises caused by maturity mismatches, credit risks, or excessive speculation. In this model, the functions of money creation and credit issuance are separated: in some theoretical constructs represented by the "Chicago Plan," narrow banks serve merely as "money warehouses," responsible for safely holding deposits and providing payment services, while credit issuance such as corporate loans is completed by other non-bank financial institutions (such as specialized lending institutions), with strict legal and financial separation between the two.

(4) RMB already has stablecoins: WeChat Pay, Alipay

From an economic mechanism perspective, platform currencies of third-party payment tools have similar functions to stablecoins, and China has certain comparative advantages in this area, having already formed a relatively complete regulatory framework. The Chinese digital payment industry, represented by WeChat Pay and Alipay, is leading globally, with "WeChat Wallet" and "Alipay Balance" serving as users' claims against payment institutions, supporting real-time account top-ups and withdrawals to cards, and facilitating various consumption, transfer, and financial scenarios. Under the centralized management system for customer reserve funds, these funds must be 100% deposited with the People's Bank of China (constituting "non-financial institution deposits" on the central bank's balance sheet), thereby constraining the use of funds by payment institutions and fully safeguarding users' assets. Thus, similar to foreign stablecoins, platform currencies are also extensions of fiat currencies, maintaining a 1:1 ratio between digital currency symbols and fiat currencies through a mechanism, with the difference being that the stability mechanism of platform currencies is stricter, and the safety of customer reserve funds is effectively guaranteed by the central bank's base currency, while regulatory norms impose stricter limitations on their financial expansion attributes.

2. As a payment tool, what costs can stablecoins lower, and what costs can they not lower?

Currently, the user base for stablecoins in conventional retail payments is very small, and application scenarios are limited. Third-party payment platforms like WeChat, Alipay, Apple Pay, and PayPal have already formed network effects and economies of scale, enjoying first-mover advantages in their respective markets. Within the same currency zone, in terms of payment convenience and security, stablecoins do not have advantages over existing third-party payment systems. The potential for stablecoins to lower transaction costs mainly lies in cross-border payments.

What factors give stablecoins a low-cost advantage in cross-border payments? A relatively competitive market structure may be an important reason. Traditional banking systems provide dollar cross-border remittance and payment services, but the centralization of the clearing system is high. The Clearing House Interbank Payments System (CHIPS) in New York, as one of the core infrastructures of the dollar cross-border payment clearing system, handles about 96% of global dollar cross-border payments. The card payment clearing institutions are dominated by a few oligopolies like Visa and MasterCard, where first-mover advantages and economies of scale lead to high entry barriers and industry concentration, thus driving up transaction costs.

Third-party digital payment platforms typically have lower transaction costs between private parties compared to traditional cross-border payment systems, with more transparent fee structures. These payment platforms often integrate digital wallet functions, and diverse user demands compel suppliers to iterate and upgrade payment services, creating differentiated competition in different regions and usage scenarios. Many third-party payment platforms have established highlights in their respective niches, such as Stripe, which offers lower cross-border fees and customizable business solutions, primarily serving online businesses with high transaction volumes or international transaction needs. However, from the merchant's perspective (the payee), transaction fees for third-party payments remain relatively high.

The openness and infrastructure architecture of stablecoins make it more likely to form a competitive market structure and bypass existing payment systems to achieve low-cost cross-border payments. First, the digital economic characteristics of stablecoins make it possible to reduce costs using new technologies, such as the competition and optimization of stablecoin public chains helping to drive down transaction fees (gas fees). Secondly, the market competition for stablecoins is relatively sufficient, with multiple existing or potential issuers competing globally, which helps keep transaction fees at lower levels. Third, compared to the banking system and third-party digital payment platforms, stablecoins face more relaxed regulation, creating certain regulatory arbitrage opportunities. In contrast, the regulatory framework for existing payment methods is relatively well-established, with banks facing strict constraints regarding capital adequacy ratios, deposit insurance, liquidity management, anti-money laundering (AML), and KYC, while third-party digital payment platforms have clear regulations regarding payment licenses, fund custody, anti-money laundering, and cross-border settlement. In comparison, stablecoins have stronger anonymity, often bypassing traditional bank cross-border settlement systems without having to comply with strict foreign exchange or capital flow controls.

It is worth noting that stablecoins can lower the costs of cross-border payments within the same currency, but for payments involving exchanges between different currencies, the situation is more complex. Stablecoins cannot eliminate the exchange costs between two currencies, which involves local banking systems, anti-money laundering, and capital account control regulatory requirements that increase transaction costs. Of course, as one side of the transaction currency, the dollar has economies of scale, and exchanges between other currencies generally occur through the dollar. This cost advantage stems from the dollar's status as an international medium of exchange. In terms of digital technology itself, dollar stablecoins do not necessarily have a competitive advantage over third-party payment tools or central bank digital currencies of other currencies. An important implication is that the role of stablecoins of other currencies in reducing the costs of cross-border economic activities is much more limited than that of dollar stablecoins.

3. The supply of stablecoins is highly elastic, and their circulation is primarily determined by demand

From the perspective of stablecoin supply, the earnings of issuing institutions come from the interest rate spread between assets and liabilities. Stablecoin issuers pay zero interest on the liability side, while the safe assets held on the asset side, such as government bonds and bank deposits, earn interest. The larger the net interest margin (interest spread minus operating expenses), the stronger the incentive for issuers to provide stablecoins. Theoretically, as long as the net interest margin is positive, the supply could be virtually unlimited. The market capitalization of dollar stablecoins has increased from several billion in 2020 to over $220 billion in the first quarter of 2025, accounting for 99.8% of the total amount of fiat-pegged stablecoins. During these years, short-term dollar interest rates have risen from nearly zero during the COVID-19 pandemic to around 4% now, providing stablecoin issuers with a significant risk-free interest spread. This may explain why more and more institutions are willing to issue stablecoins.

Given the characteristic of high supply elasticity, the circulation of stablecoins is primarily determined by demand. As a non-interest-paying payment tool, no one is willing to hold zero-interest assets significantly exceeding transaction demand. Due to the uncertainty of transaction demand, people are willing to hold some reserves, and the demand for reserves partly depends on the opportunity cost of forgoing interest income. When the yields on bank deposits or other safe assets (such as government bonds) rise, the opportunity cost for holders increases, leading to a decrease in reserve demand. In other words, the recent rise in dollar interest rates should reduce the demand for stablecoins. So how can we explain the rapid growth of dollar stablecoins during the same period?

From another perspective, the interest that stablecoin holders forgo is the price they pay for the convenience of obtaining stablecoins. Higher interest rates lead to lower stablecoin balances, but the convenience benefits provided by each stablecoin to holders increase. So what kind of convenience benefits can offset the opportunity cost brought by the significant rise in interest rates?

The first possibility is the currency substitution effect. The dollar, as the incumbent international currency, provides liquidity/safe assets, especially for economies experiencing high inflation or continuous depreciation of their local currency, where the dollar serves as a substitute for the local currency. Research has found that the willingness to hold stablecoins has increased in developing countries such as Turkey, Argentina, Indonesia, and India. For instance, in Turkey, which has high inflation, the scale of stablecoins purchased with fiat currency in 2023 was equivalent to 3.7% of GDP. However, this currency substitution should be limited; from a store of value perspective, especially considering the rising dollar interest rates, the dollar's substitution for local currencies should be more reflected in interest-bearing safe assets, such as dollar deposits in local banks. Another possibility is that dollar stablecoins substitute for dollar cash, but there is no evidence indicating the significance of this option. In comparison, both dollar cash and stablecoins pay no interest; stablecoins offer convenience in carrying and do not carry the risk of physical damage, especially advantageous for large payments, but the advantage of dollar cash is the absence of redemption risk.

The second possibility is in the field of traditional cross-border trade payments. Traditional cross-border payments have long been plagued by high costs and low efficiency, primarily due to monopolies created by highly centralized infrastructure, complex and lengthy processes, and the layering of compliance costs. In this context, stablecoins provide an alternative solution to bypass or simplify traditional hierarchical structures, utilizing digital means to achieve more direct cross-border payments, thereby breaking existing patterns and reducing transaction costs. For cross-border e-commerce sellers and businesses or individuals frequently engaging in small cross-border trades, this cost reduction is highly attractive, potentially leading to increased demand for stablecoins. However, reducing cross-border payment costs is not the "patent" of stablecoins; digital payment platforms like PayPal also have the potential to disrupt traditional cross-border payment monopolies.

The third possibility is related to cryptocurrency trading. In recent years, the prices of cryptocurrencies like Bitcoin have risen significantly and exhibited high volatility, increasing the demand for dollar stablecoins as reserves for cryptocurrency trading. Stablecoins serve as the primary intermediaries for cryptocurrency trading and are ideal safe havens during periods of price volatility for major cryptocurrencies like Bitcoin. Whether the Bitcoin market is rising or falling, the existence of derivatives such as futures contracts and perpetual contracts has led to a sustained increase in market demand for stablecoins as collateral.

The fourth possibility is related to transaction demand from underground economic activities, regulatory arbitrage, and evasion of financial sanctions. The anonymity of stablecoins in transactions makes it difficult to trace and regulate, facilitating illegal and non-compliant transactions, especially in cross-border payments, where they can be used to bypass capital account controls, increasing the difficulty of tax collection and anti-money laundering efforts. The returns from evading regulation can be seen as the convenience benefits that stablecoins provide to their holders, thus driving demand for stablecoins. Stablecoins can also be used to circumvent the current U.S.-dominated international payment system, thereby avoiding financial sanctions in geopolitical competition. For example, Russia has turned to stablecoins to facilitate oil trade with other countries, using USDT as a bridge for local currency trade settlements, and countries like Iran and Venezuela have also used cryptocurrencies for trade settlements.

Among the four possibilities mentioned above, the third and fourth are currently more reasonable speculations and are somewhat interconnected. The demand for cryptocurrency trading and gray market activities is mutually reinforcing due to the weak regulatory environment of offshore exchanges, with most cryptocurrency exchanges established in offshore financial centers, making regulatory enforcement difficult and international regulatory cooperation challenging.

4. Future Development Potential: What Stablecoins Can and Cannot Do

How should we view the future growth potential of stablecoins? Similar to cash, bank demand deposits, and third-party payment reserves, the circulation of stablecoins is primarily determined by transaction demand, which brings an important implication. In situations not involving cross-border transactions, since none of them pay interest, stablecoins do not have a significant advantage over cash, demand deposits, or third-party payment systems. Although anonymity makes stablecoins easy to use for underground economic activities, it may conversely promote such activities, and this positive feedback loop could foster a shadow financial system aimed at gray market transactions, making it hard to imagine that monetary authorities would continuously tolerate such regulatory arbitrage behavior. The growth potential of stablecoins lies in cross-border economic activities.

(1) The growth potential of dollar stablecoins primarily benefits from the dollar's status as an international currency.

At the international level, the network advantages of incumbents make the dollar most likely to benefit from the market mechanisms of stablecoins. In other words, the rapid growth of dollar stablecoins is primarily a result of the dollar's status as an international currency. Conversely, can stablecoins consolidate or even expand the role of the dollar? This depends on the performance of stablecoins in the three main functions of money (unit of account, medium of exchange, store of value). Currency substitution phenomena can occur in all three functions, but which function is more important?

The credibility of sovereign currency as a unit of account comes from government backing and is a core manifestation of national economic sovereignty. The extent to which officially established accounting currencies extend internationally or are eroded domestically is reflected in the market competition of their payment and store of value functions.

As mentioned above, in terms of the efficiency of payment means, dollar stablecoins benefit from the incumbent advantages of the dollar as an international currency. At the same time, regarding regulatory arbitrage, the degree of financial liberalization in the U.S. is higher than in other countries, and the impact of regulatory arbitrage on the U.S. is smaller than on other economies, placing dollar stablecoins in a more favorable position.

So, what is the source of the dollar's competitiveness as an international currency? The key is the currency's store of value. The U.S. financial market is large, deep, and broad, and is also the most open among large economies, attracting global investors, especially as U.S. government bonds provide safe assets for the global market. Dollar stablecoins benefit from the incumbent advantages of the dollar as an international reserve currency, while stablecoins, as new technological tools, provide a new vehicle for the dollar's expansion as a store of value in the global market.

(2) Dollar stablecoins can, in turn, promote dollarization, but there are two resistances.

Globally, competition between currencies is a zero-sum game; the dollar's gains in the international currency market mean losses for other countries. Based on the above analysis, the main countries affected by dollar stablecoins are two types: those with weak financial systems, small economies, and high inflation and exchange rate volatility, and those with capital account controls. The losses for other countries mainly occur in two aspects. First, there is the loss of seigniorage and related revenues; the monetary returns forgone by dollar stablecoin holders are obtained by stablecoin issuers and the U.S. government, the latter reflected in the demand for safe assets generated by stablecoins, which lowers the U.S. government's borrowing costs. Second, there is a decline in the effectiveness of monetary management policies. As a new payment tool, the overall scale of stablecoins is still relatively small, and regulatory agencies remain in a wait-and-see state. However, as issuance increases, its negative impacts may become apparent, prompting relevant authorities in other countries to respond by strengthening regulations to curb demand for dollar stablecoins.

Secondly, stablecoins themselves also have vulnerabilities; although they are pegged to the dollar, they are essentially private "currencies" issued by private institutions. Compared to payment methods regulated and protected under the central banking system (including third-party payment tools like WeChat Pay and Alipay), privately-led stablecoins may lack the capacity and willingness to invest in security. This involves both technical mechanisms, such as potential vulnerabilities in blockchain technology's consensus mechanisms and smart contracts, as well as economic issues, particularly the convertibility of stablecoins.

Although stablecoin issuers hold 100% liquid assets as redemption guarantees, it is difficult to completely avoid scenarios where holders lose confidence in their pegged value. Since the development of stablecoins, there have been multiple instances of large numbers of users redeeming or selling off their holdings in a short period, exceeding the response capacity of their support mechanisms, ultimately leading to a detachment from their pegged value (such as decoupling from the dollar), as seen when USDC rapidly lost its peg after the collapse of Silicon Valley Bank (SVB) in 2023. In the digital and smart era, information, including false news, spreads quickly; any rumors of insufficient reserves from issuers can lead to panic-induced runs, and panic has a herd effect.

Looking further ahead, stablecoin issuers may also have a potential motive to leverage for profit, holding lower liquidity risk assets, which could make stablecoin issuers the "wildcat banks" of the new era. Taking Tether as an example, not all of its reserve assets are high in safety and liquidity; they also include Bitcoin and precious metals, which can experience significant price volatility, as well as secured loans and other investments that are not fully transparent. Some argue that compared to Circle, which issues USDC with 100% reserve compliance, Tether has less than 20% of its reserve assets compliant with the "Stablecoin Innovation and Guidance Act," but this portion of assets is Tether's main source of profit.

It is worth mentioning that the concept of narrow banking as a financial reform has not been realized in practice, primarily because financial institutions have expansion functions. Stablecoins are still in the early stages of development and face a favorable environment with high interest spreads. Looking ahead, if the Federal Reserve lowers interest rates and U.S. government bond yields decline, the interest income for stablecoin issuers will significantly narrow. The profit motive may lead to the expansion of narrow banking operations, increasing credit risk on the asset side and maturity mismatches, thereby exacerbating the credit risk of issuing institutions.

5. From Cryptocurrency to Reserve Asset?

Recently, another topic related to dollar stablecoins (cryptocurrencies) is the U.S. government's plan to establish a "Strategic Bitcoin Reserve" and a "U.S. Digital Asset Reserve" that includes assets beyond Bitcoin. There may be many reasons for being bullish on Bitcoin; over a decade ago, many believed that Bitcoin, as a digital currency (cryptocurrency), could replace the dollar and serve as the monetary foundation for future decentralized finance. Now, few hold such views; the new narrative is that Bitcoin is a reserve asset, digital gold, which can support a currency system centered around fiat currency (the dollar). Thus, from cryptocurrency to crypto assets, the latter serves as a reserve asset for the former, forming a closed loop and constructing a new monetary system for the digital age.

We can analyze this issue from three perspectives. First, the closed loop from cryptocurrency to crypto assets does not exist. Although stablecoins use digital technology, they are economically private currencies pegged to the dollar, extensions of the dollar, and debt currencies, with no economic mechanism linking them to cryptocurrencies like Bitcoin.

Second, the form of currency in modern economies has long shifted from physical currency represented by gold to credit/debt currency, which also applies to today's "digital gold." The core characteristic of credit currency is that its value depends on the credit of the issuer (usually the government or central bank), thereby closely linking currency with "debt." Modern economies rely on "credit payments" (such as corporate credit sales, loan consumption, and bond trading), requiring currency to possess transferability and deferred payment capabilities. Debt currency naturally fits this demand through "credit-debt relationships." For example, bank deposits are essentially "claims against the bank," while stablecoins represent claims against their issuers, which can be transferred to third parties at any time.

Keynes referred to the gold standard as a "relic of the barbarous age," criticizing its rigid rules and the conflict with modern economic needs. The gold standard bound currency as an appendage to gold, directly linking the money supply to gold reserves, which led to a lack of adaptability in monetary policy to economic cycles, ultimately exacerbating economic fluctuations and even becoming a catalyst for social inequality. Keynes's monetary views propelled the shift in 20th-century monetary policy from "gold standard constraints" to "state credit dominance," providing a theoretical basis for modern central banks' "counter-cyclical adjustments" (such as interest rate cuts and quantitative easing).

The ultimate backing of credit currency is national credit. In the case of the dollar, a key manifestation is that base money is a liability of the Federal Reserve, corresponding on the asset side to the U.S. government bonds it holds. Bank money (broad money, or bank deposits) derives its credit from government guarantees and regulation, including the central bank as the lender of last resort, deposit insurance mechanisms, and even comprehensive guarantees during crises, extending government debt. The assets corresponding to dollar stablecoins are U.S. government bonds and other high-grade liquid assets, supported by government credit but lacking the regulatory and guarantee mechanisms that ensure redemption like bank money does. Extending to the international level, the dollar, as the world's primary reserve currency, is rooted in U.S. national credit, which includes being the largest economy and having the largest financial market.

Third, there may be another possibility: governments enhance their credit by holding assets with appreciation potential. For a small economy, due to its limited range of endogenous assets and insufficient long-term appreciation potential, holding exogenous assets is somewhat reasonable, such as the sovereign fund models of Norway and Singapore, or some emerging markets and developing countries' central banks holding dollar assets to enhance the external value of their local currencies. However, it is hard to imagine that a large economy, especially one that provides a global reserve currency, can effectively support its credit through the value of exogenous assets.

From a broader perspective, beyond monetary reserve assets, can cryptocurrencies like Bitcoin serve as strategic investments for governments? The long-term returns of assets can be divided into two categories: cash flow-driven returns (stocks, bonds) and price volatility-driven returns (gold). The former can achieve wealth appreciation through the "compounding effect," with the level of compounding depending on economic growth, while the latter only comes from price fluctuations driven by market supply and demand changes, with appreciation relying to some extent on speculative behavior of "buying low and selling high."

Specifically regarding government strategic investments in cryptocurrencies like Bitcoin, one possible reason is that cryptocurrencies like Bitcoin involve blockchain and other cryptographic technologies, and government endorsement may promote innovation in this field. The spillover effects of innovation could benefit society as a whole, enjoying the "compounding effect" of innovation. Although this positive externality cannot be ruled out, it needs to be balanced against the negative externalities of Bitcoin. The scale inefficiency of Bitcoin means that increased demand can only be achieved through price increases to balance supply and demand, which can have a crowding-out effect on other investments, especially real investments. In this sense, government strategic investments in cryptocurrencies like Bitcoin are not necessarily superior to investments in equities and stocks or investments in basic research, and thus do not possess an inherent necessity.

6. Policy Implications

Based on the above analysis, there are three policy implications worth discussing.

First, the dollar stablecoin embodies a contradiction between the public good attributes of the payment system and private profit motives, and its impact on macroeconomic and financial stability will compel regulatory strengthening. The current development of dollar stablecoins relies on private institutions issuing private "currencies" and allowing them to profit from interest rate spreads. This model fundamentally contradicts the public good attributes of the payment system (which require safety, stability, inclusiveness, etc.). Throughout the history of monetary and financial development, the public good attributes of bank money have been gradually improved under the mechanisms of financial regulation and government guarantees. The success of digital payment models like WeChat Pay and Alipay in China lies in maintaining the public good attributes of payment channels through effective regulation while adhering to market-oriented operations. The general rule of market innovation in the financial sector preceding regulatory strengthening should also apply to stablecoins.

Second, from the perspective of international currency competition, the U.S. benefits the most from the mechanism of stablecoins. As private currency provided by narrow banks, dollar stablecoins benefit from the dollar's status as an international reserve currency, including the incumbent advantages of financial markets. The expansion of dollar stablecoins is an extension of the dollar's status as an international reserve currency, and its network effects and regulatory arbitrage may, in turn, help strengthen the dollar's international position. For other non-U.S. economies, facing the inherent advantages of the incumbent international currency in market competition, developing local currency stablecoins to counter dollar stablecoins is not the optimal strategy. This is not only because other countries' comparative advantages do not lie in finance but may also introduce new complexities and risks, such as impacting the efficiency of monetary management and capital account management, which may explain why the European Central Bank emphasizes developing the digital euro (central bank digital currency) to respond to dollar stablecoins.

Third, for China, the key to countermeasures lies in leveraging China's advantages of a large real economy and a large population (broad application scenarios). China should vigorously promote the application of digital currencies from platforms like WeChat Pay and Alipay in cross-border payment scenarios, while also utilizing the exogenous strength of central bank digital currency to support the development of platform currencies in cross-border payment businesses, building a new, efficient, and low-cost cross-border payment infrastructure (including through multilateral central bank digital currency cooperation). The platform currencies of third-party payment tools themselves possess characteristics of stablecoins, and compared to dollar stablecoins, they have stronger attributes of the real economy and weaker financial attributes, and under the empowerment of the platform, they have already formed a certain network effect, which is China's comparative advantage.

Of course, stablecoins represent a new type of payment technology and model, which may have currently unclear positive spillover effects, and completely denying them is not the optimal choice. How to leverage Hong Kong's unique advantages as an international financial center and the largest offshore market for the renminbi is worth exploring. Using Hong Kong as a controlled testing ground for renminbi stablecoins and a regulatory correction field can help balance the multidimensional relationship between technological innovation potential and maintaining the public good attributes of payments, financial stability, and national monetary sovereignty.

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