A panoramic analysis from central bank regulation to market manipulation.

Written by: Zhou Xiaochuan, former central bank governor

Source: China Financial Forty Forum

Note: This article is based on part of the speech by Zhou Xiaochuan, former governor of the People's Bank of China, on July 13, 2025, at the CF40 bi-weekly closed-door seminar "Opportunities and Prospects for Renminbi Internationalization." The main content is derived from his speech on June 5, 2025, at the International Capital Market Association (ICMA) annual meeting in Frankfurt, with slight adjustments.

Currently, some discussions about stablecoins are only from a single perspective. To deduce the operation and future prospects of stablecoins, a multi-dimensional and multi-perspective examination is necessary. If we hope to promote the development of digital payment systems and achieve healthy growth, we must also pay attention to multiple dimensions of performance and balance.

1. Central Bank Dimension: Preventing Excessive Currency Issuance and High Leverage Amplification

Stablecoin issuers may wish to bear minimal costs while obtaining the maximum scale of stablecoin issuance and application. They might wonder, why can central banks print money, and can’t I? Nowadays, they can also have a money-printing function through stablecoins, but due to a lack of deep understanding and responsibility regarding monetary policy, macroeconomic regulation, and public infrastructure functions, they may lack sufficient self-discipline, potentially leading to uncontrolled issuance, high leverage, and instability. The stability of stablecoins is not self-proclaimed; there needs to be a judgment mechanism.

Currently, the central bank has at least two concerns. One is "excessive currency issuance," meaning that issuers issue stablecoins without real 100% reserves, which is over-issuance; the second is the emergence of high leverage amplification, meaning that the operation after issuance will produce a multiplier effect of currency derivation. In this regard, the U.S. "GENIUS Act" and Hong Kong's "Stablecoin Regulation" have already paid attention, but there is still a significant lack of control.

First, it should be clear who the custodian of the issuance reserves is. In practice, there have been cases where custodians did not fulfill their duties. In 2019, Facebook initially planned to self-custody the reserves for Libra, which allowed for strong autonomy and the retention of the income from the custodial assets. However, reserve custody must be reliable and should be conducted by the central bank or a custodian recognized and regulated by the central bank; otherwise, it is not very reliable.

Second, how to measure and manage the amplification effect during the operation of stablecoins? Even if the issuer places 100% reserves, stablecoins will still exhibit a multiplier effect in subsequent operational links (such as deposits, loans, collateral, trading, and revaluation), and the potential amount to be addressed in a bank run could be several times the issuance reserves. On the surface, relevant regulations may prevent amplification, but a deeper observation of the laws of currency issuance and operation reveals that existing rules are far from sufficient to address derivation and amplification.

We can refer to the example of three commercial institutions in Hong Kong issuing Hong Kong dollar cash: the issuance mechanism of the three note-issuing banks in Hong Kong requires that for every 7.8 Hong Kong dollars issued, they must pay 1 U.S. dollar to the Hong Kong Monetary Authority as reserves, while also obtaining a liability certificate. Based on the M0 of Hong Kong dollars, the economic financial system generates M1 and M2 through derivation and multiplier effects. In the case of a bank run, it will target not only M0 but also M1 or M2. Even if the base currency M0 has 100% reserve backing, it cannot rely on M0 reserves to respond to a bank run and maintain currency stability.

The amplification effect of stablecoins has three known typical channels: first, the deposit-loan channel; second, the collateral financing channel; and third, the asset market trading channel (which can additionally purchase or revalue the issuance reserve assets). Therefore, regulators need to statistically measure and calculate the actual circulation of issued stablecoins; otherwise, it is impossible to ascertain the potential scale of redemption risks. The amplification multiplier effect of stablecoins also provides opportunities for fraud and market manipulation.

2. Financial Service Model Dimension: Real Demand for Decentralization and Tokenization

Assuming that the future ecosystem is characterized by large-scale decentralization of financial activities and large-scale tokenization of assets and trading tools, stablecoins will be very useful. First, stablecoins can adapt to the development of decentralized finance (DeFi); second, tokenization is a necessary foundation for the operation of DeFi. It is essential to explore why or to what extent we are moving towards decentralization and tokenization.

From the supply side, blockchain and distributed ledger technology (DLT) indeed provide characteristics for decentralized operations; however, from the demand perspective, how much demand is there for decentralization as a new operating system? Will most financial services transition to this new system?

Upon reflection, not all financial services are suitable for decentralization, and there are not many financial services that can achieve significant efficiency improvements through decentralization. The real demand for tokenization as a technological foundation also needs to be carefully estimated.

From the perspective of upgrading the anticipated payment system (especially cross-border payments), the retail payment systems in China and several Asian countries have made successful progress based on mobile phones, using QR codes and near-field communication (NFC) as merchant interface applications, which are still account-based. Currently, the digital currency developed in China is also account-based, extending and iterating the existing financial system. Additionally, some rapid payment systems in Asian countries have cross-border direct connections without choosing a decentralized or tokenized route.

As of now, centralized account systems still demonstrate good applicability. There is insufficient theoretical basis to replace account-based payment systems with fully tokenized systems.

The Bank for International Settlements (BIS) has proposed a centralized ledger architecture—Unified Ledger—that tokenizes bank deposits and other financial services, allowing central bank digital currencies (CBDCs) to play an important role within a centralized framework, combining centralization and tokenization. It is worth questioning whether all types of financial assets are suitable for tokenization and whether all financial service links are suitable for decentralization; each must be analyzed and compared specifically.

3. Payment System Perspective: Technical Pathways and Compliance Challenges

The upgrade of payment systems has two major concerns: one is payment efficiency, and the other is compliance.

Improving payment efficiency is considered one of the potential advantages of stablecoins. In the current digitalization process of payment systems, there are roughly two paths to enhance efficiency. The first path is to continue to optimize and innovate based on account systems, leveraging IT and internet technologies. The second path is a new payment system based on blockchain technology and cryptocurrencies.

From the current development of payment systems in China and Southeast Asia, the main progress achieved so far is still based on internet and IT technologies, including the development of third-party payment platforms, advancements in central bank digital currencies (CBDCs), reliance on NFC hard wallets, and interconnections of rapid payment systems. These advancements have significantly improved payment efficiency and convenience.

The technical route itself is not the only criterion; the comparison of payment performance must also place a high emphasis on security and compliance, including Know Your Customer (KYC), identity verification, account management, anti-money laundering (AML), counter-terrorism financing (CFT), anti-gambling, and anti-drug trafficking compliance requirements. Some believe that since stablecoins are based on blockchain, they do not involve account opening. This is not accurate. Even when using "soft wallets," user identity verification is required, and the account opening process must be followed to meet compliance requirements. Currently, stablecoin payment services have significant deficiencies in KYC and compliance.

4. Market Trading Dimension: Market Manipulation and Investor Protection

From the perspective of financial markets and asset market trading, the most pressing issue to prevent is market manipulation, especially price manipulation, for which sufficient transparency and effective regulation need to be established. In fact, such manipulation has already occurred, with several related cases having taken place. Some of these price manipulation behaviors have clear fraudulent characteristics. However, under the improved current institutional framework, whether it is the U.S. "GENIUS Act," Hong Kong's relevant regulations, or Singapore's regulatory provisions, these issues have not yet been satisfactorily addressed.

A new phenomenon is the mixed use of hybrid coins or multiple currencies, meaning that multiple currencies are used simultaneously for transactions or payments within a single system, and not all combinations are true stablecoins, nor do they necessarily have a consistent, recognized standard for stablecoins. In the current asset market, especially in virtual asset exchanges, many trading objects can be paid for with stablecoins, as well as non-stable other cryptocurrencies, or even completely unstable currencies. This arrangement provides opportunities for market manipulation and has become a focus of regulatory concern.

It is noteworthy that some market promoters mention that through stablecoins and RWA (Real World Assets) and other technological means, the shares of asset transactions can be divided very small, thus achieving broader investor participation, claiming that this model has attracted a large number of students under 18 to participate in trading.

Although some believe this helps cultivate youth participation in the capital market and contributes to the future prosperity of the capital market, from the perspective of investor protection, whether this practice is genuinely beneficial remains to be seen. In the past, there has been an emphasis on the adaptability and qualification requirements of investors; there is currently insufficient basis to determine whether minors are suitable for participating in asset market trading. If market manipulation cannot be effectively prevented, attracting unqualified investors into the market will significantly increase risks.

5. Micro-Behavior Dimension: Motivations of Participants

Stablecoin issuing institutions are generally profit-oriented commercial entities, and many entities involved in stablecoin-related payment and asset trading businesses are also commercial institutions, which must have their commercial motivations. However, stablecoins and payment systems include some functions or links with infrastructure and inclusive attributes, which cannot be guided by the logic of maximizing corporate self-interest but should embody the spirit of public service. There should be a clear distinction regarding which areas are suitable for market-oriented entities and which belong to infrastructure.

A micro perspective is needed to analyze the motivations and behavior patterns of various participants in stablecoins at the micro level. What considerations do people have when using stablecoins for payments? Why are payees willing to accept stablecoins? What motivations do stablecoin issuing institutions have? What trading scenarios do private exchanges pursue? Currently, Hong Kong has issued licenses to 11 virtual asset trading platforms; what trading subjects and trading varieties do these licensed institutions focus on? How do they profit?

Although many believe that stablecoins will reshape the payment system, objectively speaking, the current payment system, especially in the retail payment sector, has little room for cost reduction. In China, the existing retail payment system, including third-party payment platforms, central bank digital currencies (CBDCs), soft and hard wallets, and clearing infrastructure, has not adopted a decentralized and tokenized route. After years of development, it has become very efficient and low-cost, making it very limited for any new entrants to reduce costs and profit in this field.

In the United States, there may still be some room for cost reduction and profit in the retail payment system, as the U.S. has long relied on a credit card payment system, where merchants typically bear a 2% price discount, thus having the motivation to try new, lower-cost payment systems. This also indicates that, from the perspectives of payers and payees, the situations in different countries and regions vary.

Cross-border payments and remittances are often highlighted as key areas when discussing the application scenarios of stablecoins. To delve into this issue, it is first necessary to break down the reasons for the high costs of current cross-border payments, specifically examining which links lead to high fees.

It should be noted that some claims about traditional cross-border payment systems being "very expensive" from a technical perspective may be exaggerated. In reality, many of the cost factors are not technical but involve foreign exchange controls, which are linked to various institutional issues such as balance of payments, exchange rates, and monetary sovereignty. Another portion of the costs comes from compliance costs like KYC and AML, which are difficult to avoid even when using stablecoins. Additionally, some costs arise from cross-border foreign exchange operations as a form of licensed "rent." In summary, the appeal of stablecoins in cross-border payments may not be as significant as imagined. Of course, this should be considered differently in scenarios where the local currency has been mismanaged and there is a need to introduce dollarization.

From the perspective of stablecoin issuers, if they perceive insufficient appeal in domestic and cross-border payments, the most likely focus of application will be in asset market trading, particularly in virtual asset trading. Certain assets in such markets have strong speculative attributes, making them susceptible to price manipulation, thereby creating an attraction for the issuance of stablecoins. Moreover, some virtual assets can serve as qualified or semi-qualified reserves for stablecoin issuance.

From the current micro-behavior perspective, there is a risk of stablecoins being excessively used for asset speculation, and a deviation in direction may lead to fraud and instability in the financial system.

Furthermore, it is worth noting that the stablecoin-related industry may leverage the popularity of stablecoins to enhance their company's valuation. Some companies may use this to "raise funds" through the capital market or realize capital appreciation for cashing out, while the stablecoin business itself, its profitability, and sustainability may not be their primary focus. This is detrimental to the healthy development of the entire financial system and may accumulate systemic risks.

6. Circulation Path Dimension: The Recycling Mechanism from Issuance to Redemption

The circulation path of stablecoins involves the entire cycle from issuance to market circulation in specific scenarios and back to redemption.

Taking the issuance of paper currency by the People's Bank of China as an example, the printed banknotes are first stored in a specific issuance vault. Whether and when these banknotes enter the market depends on whether commercial banks have a demand for cash. Commercial banks will only withdraw cash from the People's Bank of China's issuance vault when their customers have a net demand or show a loan surplus. After withdrawal, this incurs an occupancy cost for the commercial banks, so when they have excess inventory, they will return cash to the vault. This indicates that the circulation of currency does not occur automatically.

Similarly, stablecoin issuers obtain relevant licenses and pay reserves, but this does not equate to the issuance of stablecoins. If there is insufficient demand in the market, stablecoins may not enter effective circulation, meaning that they could obtain an issuance license but fail to issue. Theoretically, the circulation path should be networked, often with several major lines of traffic. If the main line used for payments is not smooth, the primary channel for stablecoins to enter circulation may overly rely on the speculation of virtual assets, raising concerns about their health.

Additionally, whether stablecoins are used as a temporary payment medium at the time of transaction or as a value preservation tool for a certain period will affect the amount of stablecoins remaining in the market after issuance. If they are only used for transactions and held as little as possible, the role of stablecoins is weakened, and the issuance volume is reduced, which involves circulation paths, holding motivations and behaviors, and supporting systems. This is not something that can be automatically granted by an issuance license.

In summary, in facing the new phenomenon of stablecoins, scholars, researchers, and practitioners need to observe and analyze their functions and realization paths from multiple dimensions, avoiding the use of imprecise concepts, data, and one-sided thinking. By comprehensively discerning various important dimensions, we can better grasp market trends.

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