As the global stablecoin market thrives and countries compete to establish their positions, Zhou Xiaochuan, the former governor of the People's Bank of China, has issued a stern warning. He believes that stablecoins pose risks of fraud and instability to the financial system and questions the necessity of adopting stablecoins. Zhou Xiaochuan's remarks come at a time when there are reports that China is exploring the approval of a stablecoin based on the renminbi, undoubtedly dousing cold water on the booming stablecoin market and prompting deep reflection within the industry on the future direction of stablecoins.
- Zhou Xiaochuan's "Six-Dimensional" Warning: The Potential Hazards of Stablecoins
Zhou Xiaochuan, the former governor of the People's Bank of China, deeply analyzed the potential risks of stablecoins from "six dimensions" during a closed-door seminar in July and issued a warning:
Excessive Currency Issuance and High Leverage Risks: Zhou Xiaochuan stated that it is necessary to guard against "excessive currency issuance" and the amplification of high leverage, meaning that issuers may issue stablecoins without real 100% reserves, and the operation after issuance may generate a multiplier effect of currency derivation. He believes it is essential to clarify who the custodian of the reserves is, which should be the central bank or a custodian recognized and regulated by the central bank; otherwise, it is not very reliable.
The Real Demand for Decentralization and Tokenization: Zhou Xiaochuan pointed out the need to examine the real demand for decentralization and tokenization. He believes that only a few financial services can truly improve efficiency through tokenization and decentralization and calls for an objective assessment of the genuine demand for these two methods. He noted that payment systems are already very efficient and low-cost, leaving very limited space for any new entrants to reduce costs and profit in this field.
Payment Efficiency and Compliance Challenges: Zhou Xiaochuan mentioned that it is necessary to consider payment efficiency and compliance challenges, which include "Know Your Customer" (KYC), identity verification, account management, anti-money laundering (AML), counter-terrorism financing (CFT), anti-gambling, and anti-drug trafficking. Currently, stablecoin payment services still have significant deficiencies in KYC and compliance.
Market Manipulation Risks: Zhou Xiaochuan stated that the most critical risk to guard against is market manipulation, especially price manipulation. He believes that current regulations, whether the U.S. "GENIUS Act," related regulations in Hong Kong, or regulatory provisions in Singapore, have not yet achieved a reassuring level.
Excessive Speculation Risks: Zhou Xiaochuan mentioned the need to examine the motivations of various participants, clarifying which areas are suitable for market-oriented entities and which belong to infrastructure nature. Additionally, there should be vigilance against the risk of stablecoins being excessively used for asset speculation, as deviations in direction may lead to fraud and instability in the financial system.
Circulation Path Risks: Zhou Xiaochuan pointed out the need to pay attention to the circulation path of stablecoins, which involves the entire cycle from issuance to market circulation in specific scenarios and back. If there is a lack of sufficient demand scenarios, stablecoins may not enter effective circulation, meaning they could obtain an issuance license but fail to issue.
- The "Multiplier Effect" Risk of Stablecoins: Zhou Xiaochuan's Concerns
Zhou Xiaochuan also warned that issuers might recklessly mint stablecoins without sufficient reserves, and in the current lack of regulation, custodians may not be able to perform adequate due diligence.
"Multiplier Effect": Zhou Xiaochuan stated that even with reserves fully supporting issuance, stablecoins can still generate a "multiplier effect" because tokens will be used for subsequent operations such as loans, collateral, trading, and revaluation, leaving footprints that exceed the capacity of the reserves. He even stated, "The possible amount (of a bank run) could be several times the issued reserves."
Insufficient Regulation: He added that existing stablecoin rules, such as the U.S. "GENIUS Act" or Hong Kong regulations, are "far from sufficient" to address such issues.
- China's Shift in Attitude Towards Stablecoins and Challenges
Policy Reversal: Recent reports indicate that China is considering allowing the issuance of stablecoins pegged to the renminbi, which sharply contrasts with China's previous stance against cryptocurrencies. China continues to ban cryptocurrency trading and mining, while Hong Kong actively embraces the cryptocurrency industry and has established a licensing system for cryptocurrency exchanges and stablecoin issuers.
Responding to Dollar Dominance: Reports suggest that this move is likely a response to the U.S. rapidly supporting dollar stablecoins to consolidate the dollar's dominant currency status. Neighboring countries, including Japan and South Korea, have also seen similar government-led initiatives.
Regulatory Vigilance: According to Bloomberg, Chinese regulators seem to remain vigilant about potential negative risks, recently requesting domestic brokerages to stop promoting these products through research and seminars.
Conclusion:
Zhou Xiaochuan, the former governor of the People's Bank of China, has issued a stern warning about stablecoins, revealing the potential risks of fraud, instability, and "multiplier effects" that stablecoins may bring to the financial system. His remarks have doused cold water on the booming stablecoin market and remind regulatory agencies worldwide to be vigilant about the potential risks that stablecoins may pose while promoting financial innovation.
Related Reading: China's Consideration of Launching Stablecoins Raises Questions About Dollar Dominance and Market Trust
Original Article: “Why Did Former PBOC Governor Issue a Stern Warning on the Yuan Stablecoin?”
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