Stablecoins represent the forefront of digital financial development, bringing unprecedented challenges while containing significant opportunities.
Written by: Deng Jianpeng, Professor at the Law School of Central University of Finance and Economics, Expert in Blockchain Law Research
I. The Quiet Digital Currency Revolution
Imagine a "digital dollar" that holds a value almost equivalent to 1 dollar in the online world, allowing for rapid transfers globally with transaction fees only one-tenth of traditional cross-border payments. This is stablecoin—one of the most revolutionary financial innovations of our time and also one of the most controversial forms of digital currency.
Since its inception in 2014, the stablecoin market has grown from zero to nearly 320 billion dollars, equivalent to the annual GDP of a developed country like Switzerland. Even more astonishing is that Tether, the company issuing USDT, operates with fewer than 200 employees, generating an annual net profit of 13.7 billion dollars, which translates to nearly 100 million dollars per employee, making it dozens of times more efficient than traditional financial giants.
This digital financial revolution is changing our payment methods and investment habits at an unprecedented speed, even challenging the foundations of the traditional financial system. Let us delve into the various aspects of stablecoins and see how they affect our wallets and where they will lead the world.
II. Stablecoins: The "Hard Currency" of the Digital World
What are Stablecoins?
In simple terms, stablecoins are cryptocurrencies that attempt to maintain a 1:1 exchange ratio with a fiat currency (primarily the US dollar). However, this "stability" is relative. Taking the most common Tether (USDT) or USDC as examples, in most cases, people can treat them as equivalent to 1 dollar when trading on the secondary market or shopping offline, but their price may also be slightly above 1 dollar, and in extreme cases, it can drop below 1 dollar or even become worthless.
Technical Foundation: A Global Ledger on Blockchain
Stablecoin tokens operate on public blockchains, with transactions recorded on the same blockchain ledger. This ledger can be Ethereum, Bitcoin network, Solana network, etc. Essentially, blockchain is a global integrated ledger, allowing peer-to-peer transactions without intermediaries, with transaction speeds as fast as sending an email.
However, this convenience comes at a cost: if an incorrect amount is sent or the wrong address is used, it is nearly impossible to hold anyone accountable or retrieve the funds due to the absence of a third-party intermediary. It's like putting cash in the wrong pocket; once it leaves your hands, it's hard to get back.
Market Status: The Dominance of Dollar Stablecoins
When we discuss stablecoins, we are primarily talking about dollar stablecoins. Since the emergence of Tether in 2014, fiat-backed stablecoins have become mainstream, with the market capitalization of dollar stablecoins accounting for as much as 95%. As of August 23, 2025, the total market capitalization of stablecoins reached over 260 billion dollars, and by early November, it had exceeded 310 billion dollars, showing rapid growth.
In terms of market capitalization distribution, Tether (USDT) and USDC together account for over 80%, becoming the focus of academic and regulatory research. Although stablecoins had relatively small market capitalizations six or seven years ago, their turnover rates were extremely high—reaching a daily turnover rate of 500% in 2019, with total monthly trading volumes exceeding 3 trillion dollars, far surpassing their market capitalization.
Remarkable Profitability
Circle, the issuer of USDC, represents compliant stablecoin issuers, with a stablecoin market capitalization of about 70 billion dollars. After going public in June this year, its stock price skyrocketed tenfold within a month, causing a sensation in the investment community.
Even more surprising is Tether's profitability. This company, with fewer than 200 employees, achieved a net profit of 13.7 billion dollars last year, nearly 100 million dollars net profit per employee. In contrast, international credit card giant VISA has 30,000 employees and reported a net profit of 19.7 billion dollars last year. This illustrates the profitability and market appeal of stablecoins.
Three Core Features of Stablecoins
1. Centralized Issuance and Decentralized Circulation
Unlike central bank digital currencies, stablecoins are issued by private entities and do not rely on state power for direct promotion. For example, Tether has achieved decentralized asset circulation through public blockchain ledgers, allowing its stablecoins to flow freely in a global integrated blockchain network, including networks like Bitcoin, Ethereum, Polkadot, and Solana. This borderless, cross-jurisdictional circulation model breaks through traditional geographical and jurisdictional boundaries, posing a new challenge to traditional financial regulatory systems.
2. Efficient Payment and Settlement System
Compared to traditional payments, stablecoins do not require intermediaries, providing the shortest payment path with instant settlement, combining payment, clearing, and settlement in one step. Cross-border payment fees are about one-tenth or even lower than traditional payments, making their advantages particularly evident in the cross-border payment sector. For the approximately 900 million to 1 billion unbanked individuals globally, stablecoins do not require a bank account; as long as they have a mobile phone and can download a cryptocurrency wallet, they can participate in global payments, offering high financial inclusivity.
3. Innovative Issuance and Redemption Mechanism
The issuance process of stablecoins is as follows: authorized participants (such as large institutions) apply to Tether to issue 100 million stablecoins and, after passing the review, transfer 100 million dollars to Tether's bank account; upon receiving the funds, Tether issues 100 million USDT to the institution's crypto wallet, while reserving 10%-20% of the transferred funds as a dollar fund reserve to meet redemption demands, with the remaining 70%-80% primarily invested in highly liquid, low-risk U.S. Treasury bills with maturities of 93 days or less (yielding an annualized return of 4.25%). Through this business model, Tether achieves nearly risk-free profits.
The redemption process is the opposite: authorized participants send Tether tokens to a designated wallet, Tether sells U.S. Treasury bonds to obtain cash, which is then paid to the authorized participants, while the corresponding Tether tokens are destroyed. This mechanism ensures a dynamic balance between the supply of stablecoins and reserve assets.
Future Outlook: The Integration of Stablecoins and Artificial Intelligence
The combination of stablecoins and artificial intelligence holds vast potential and significant research value. Currently, the application of artificial intelligence in finance is limited by its inability to independently open accounts; AI entities cannot hold cash or complete payments, restricting their functions to basic levels such as intelligent customer service and investment advisory.
The semi-anonymity (no identity verification required) and decentralized characteristics of blockchain technology can precisely fill this gap, enabling AI entities to achieve autonomous payments through cryptocurrency wallets. This integration will fundamentally change the rules of the real economy: for example, AI entities could autonomously plan travel itineraries, book flights and hotels for users, or incentivize internet users to create content through stablecoin tipping mechanisms, achieving seamless transactions 24/7.
Compared to the limitations imposed by legal constraints in traditional finance, numerous practical cases of autonomous token issuance and intelligent tipping have emerged on the blockchain. This integration not only has the potential to reshape the rights and obligations structure in the financial sector but will also give rise to entirely new trading models, providing a breakthrough with significant academic value for future financial research.
III. Four Major Risks and Challenges of Stablecoins
Based on research reports from renowned international financial organizations such as the Bank for International Settlements and the Financial Stability Board, as well as industry observations, we can summarize the following four main risks and challenges of stablecoins:
(1) Risks of Illegal Activities and Regulatory Evasion
Criminal activities such as telecom fraud, drug trafficking, and organ trafficking often utilize stablecoins as tools to launder massive profits. Stablecoins possess a certain degree of anonymity and pseudonymity, with no identity verification requirements, and the blockchain does not rely on traditional financial rules.
To enhance anonymity, criminals also use mixing tools; for example, the Tornado Cash mixer, which has been sanctioned by the U.S., can completely hide identities, and even North Korean hackers have used such tools to evade tracking. More critically, the peer-to-peer transaction characteristics of stablecoins based on non-custodial wallets bypass the need for regulated third-party entities, rendering traditional anti-money laundering and counter-terrorism financing systems ineffective, significantly weakening the effectiveness of financial regulation and becoming a "gray channel" for the cross-border flow of illegal funds.
(2) Challenges to Monetary Sovereignty and Monetary Policy
The large-scale cross-border use of dollar stablecoins infringes on the monetary sovereignty of other countries. In countries with severe inflation, such as Zimbabwe and Turkey, some have experienced inflation rates of 70% in a year, with others even reaching 200%. Rational individuals naturally choose to exchange their national fiat currency for dollar stablecoins, and this rational choice directly weakens the circulation demand for their national currency, creating a substitution effect for fiat currencies while impacting foreign exchange controls and other monetary sovereignty measures.
Traditional regulatory measures are almost ineffective against this, and unless extreme measures such as internet shutdowns are taken, it is difficult to prevent capital from flowing out through stablecoin channels. This undoubtedly poses a fundamental challenge to the ability of various countries to maintain monetary stability and implement independent monetary policies.
(3) Financial Stability and Systemic Risks
Stablecoin issuing institutions, in pursuit of profit maximization, may purchase high-risk investment products, posing significant risk hazards. For instance, early stablecoin issuers used dollar cash to buy Bitcoin, which exhibited extreme volatility between 2015 and 2021, with daily fluctuations of 30%-70% being commonplace.
Under U.S. regulatory rules, stablecoin reserve funds held in banks lack federal deposit insurance, posing potential risks. Moreover, stablecoins have experienced multiple de-pegging events, such as the algorithmic stablecoin LUNA, which fell from a 1:1 exchange with the dollar to 0.14, ultimately collapsing from a market value of 50 billion dollars to zero, leading to many individuals losing their fortunes. Historical experience shows that stablecoins lacking effective regulation and real asset anchoring carry significant risks.
(4) Cross-Border Regulatory Coordination and Compliance Dilemmas
The characteristic of stablecoins relying on public chains for seamless global circulation leads to fundamental dilemmas in cross-border regulatory coordination and compliance: countries exhibit significant differences in their regulatory attitudes toward stablecoins, with China imposing a complete ban, the U.S. allowing limited use, Hong Kong operating under a licensing regime, while other countries or regions choose to completely ignore them (laissez-faire).
The decentralized architecture of public chains naturally places issuing institutions outside the jurisdiction of any single nation, creating direct conflicts with the financial regulatory rules of individual nation-states. Although financial regulatory powers like the U.S. can enforce compliance and overseas law enforcement through extraterritorial jurisdiction (such as the U.S. Treasury's FinCEN), the lack of regulatory capacity in weaker countries may lead issuing institutions to evade relevant regulations in those countries or regions.
This results in the practical difficulty of enforcing the same business, the same risks, and the same regulatory principles, which can also lead to regulatory arbitrage. When global judicial bodies frequently request asset freezes due to stablecoins being involved in fraud, drug trafficking, and other criminal activities, issuing institutions (like Tether) will inevitably choose selective judicial cooperation when responding to billions of cross-border judicial assistance requests, prioritizing responses to strong countries like the U.S. while neglecting the appeals of weaker nations, ultimately trapping cross-border anti-money laundering cooperation in a compliance deadlock of "the strong eat the weak, and the weak receive no aid."
IV. The U.S. Stablecoin Regulatory Framework and Global Impact
The "GENIUS Act," passed in the U.S. in July this year, presents a noteworthy regulatory framework for stablecoins, particularly regarding dollar stablecoins and their global impact, which deserves in-depth analysis.
Core Content of the Regulatory Framework
From a reserve requirement perspective, the act mandates that issuing institutions must either be fully backed by reserves in dollars or hold U.S. Treasury bills with maturities of 93 days or less, which are liquid, low-risk, and yield considerable returns. Issuing institutions can only choose between cash and U.S. Treasury bills, with no other forms of reserves allowed.
In terms of regulatory classification, those with a market capitalization exceeding 10 billion dollars are regulated by the Federal Reserve System, the Treasury Department, and the Office of the Comptroller of the Currency, while those below 10 billion dollars are regulated at the state level. For instance, the USDC issuing institution is federally regulated, and this "big fish gets caught while small fish are released" model offers valuable reference for China in formulating relevant regulatory laws in the future.
Transparency and Compliance Requirements
The bill prohibits misleading marketing, requires issuers to comply with anti-money laundering and know-your-customer regulations, and mandates annual audits of financial statements to ensure transparency in issuance. Previously, Tether was considered the "aircraft carrier" in this field, with a market capitalization reaching 170 billion dollars since its promotion in 2014, but it has lacked effective regulation for nearly a decade.
It claims that every Tether token is backed by one dollar in reserve assets, but this has long been questioned. Although early on, third-party independent auditing firms verified its reserves were sufficient, no institution has dared to audit it in the past seven or eight years. Its reserve cash was once held in banks in unknown countries in Central America, causing concern among stablecoin holders about potential defaults by Tether leading to a crash in Bitcoin. Therefore, transparency requirements are crucial, and this rule in the U.S. reshapes the industry.
Anti-Money Laundering Responsibilities and Regulatory Technology
The GENIUS Act designates issuers as the "first responsible party" for anti-money laundering and combating illegal financial activities, requiring them to have the technical capability to respond immediately when the FBI requests the freezing of suspected illegal Tether tokens. At the same time, the U.S. Treasury's FinCEN (Financial Crimes Enforcement Network) requires the development of detailed rules and new tools to monitor Tether's crypto activities and review compliance plans.
Strategic Intent and Global Impact
This bill is significant and friendly to the entire cryptocurrency sector, but its strategic intent warrants caution from financial regulatory agencies worldwide. On one hand, it establishes rules for the industry, reshaping global regulations and influencing the direction of rules in this field; on the other hand, it solidifies the linkage mechanism between stablecoins and the U.S. dollar and U.S. Treasury bonds, creating a perfect closed loop of the dollar, stablecoins, and U.S. Treasury bonds. It encourages, promotes, and even compels issuing institutions to become significant buyers of U.S. Treasury bonds, reinforcing the dollar's position in the international monetary system, increasing global acceptance and demand for the digital dollar, and further consolidating the dollar's dominance in international finance.
Potential Issues and Regulatory Gaps
There are also some issues with U.S. regulations. First, there is no federal insurance guarantee for reserves, which could lead to problems in the event of extreme risks. For example, last year, Circle faced risks when approximately 3 billion dollars of its reserves were held in Silicon Valley Bank, causing its issued dollar stablecoin USDC to drop from a 1:1 ratio with the dollar to 0.8.
Second, the foundational security of stablecoins has not been addressed in the current legislation, such as verifiable reserve transparency, redemption commitments, orderly risk disposal that can be rehearsed, and risk disposal processes have not been mentioned. Third, real-time reporting of redemptions and liquidity, daily net asset value reports, and third-party transparent audits are not comprehensively reflected in the U.S., Hong Kong, and the EU's MiCA regulatory framework for crypto assets, which are areas that future financial regulatory research needs to explore.
Additionally, dollar stablecoins pose significant privacy risks, as the transfer records of stablecoins based on public chains are permanently stored on the blockchain and can be accessed by anyone, potentially leaking users' personal privacy and business secrets. Future regulatory rules on how to protect user privacy and business secrets urgently need exploration.
V. The Sovereignty Game of Digital Currencies and the Impact of Stablecoins
The Context of U.S.-China Financial Competition
In recent years, competition between China and the U.S. in the international financial arena has intensified, profoundly impacting dollar stablecoins. Since 2017, financial security conflicts at the level of the international financial system between China and the U.S. have escalated. After the Russia-Ukraine war in 2022, the U.S. and the EU imposed over 6,000 sanctions on Russia, including its removal from SWIFT, raising widespread concerns among other countries about financial sanctions.
As a major economic and financial power, China must consider countermeasures, such as de-dollarization, issuing central bank digital currencies, and collaborating with Belt and Road countries to create digital currency bridges, but these solutions have various limitations. In this context, stablecoins may represent another opportunity window for China.
A New Pillar of Dollar Hegemony
In the past two years, the dollar has weakened, and U.S. Treasury bonds have become less popular, with some financial scholars arguing that U.S. financial hegemony is declining and international financial power is shifting. However, the dollar stablecoins promoted by the GENIUS Act may bring new opportunities, potentially reversing this trend.
Dollar stablecoins are growing rapidly, and their issuing institutions have become significant buyers of U.S. Treasury bonds, holding 128 billion dollars in U.S. Treasury bonds over the past 12 months, making them one of the top 20 holders of U.S. Treasury bonds, surpassing sovereign nations like Germany and Saudi Arabia. A Citibank research report indicates that by 2030, stablecoin holdings of U.S. Treasury bonds could soar to 3.7 trillion dollars, which, if realized, would make them the largest globally, potentially reversing the trend of declining dollar hegemony.
Among all types of stablecoins, dollar stablecoins are expected to be the most popular in the past and the next decade. Citizens of countries with weak fiat currencies are more likely to choose a strong currency, which could accelerate the marginalization of other weaker fiat currencies and even impact the internationalization process of the renminbi.
A New Mechanism for Currency Creation
Stablecoin issuers also face issues related to currency creation. The Bank for International Settlements' 2025 report suggests that stablecoins lack elasticity, but actual issuing institutions engage in currency creation and credit expansion. For example, if Tether receives a payment of 1 million dollars in cash from an authorized participant (similar to M1), a small amount of cash is kept in the bank, while most is used for investments (such as purchasing U.S. Treasury bonds or even gold), and simultaneously, Tether pays the authorized participant 1 million USDT, which is close to M2.
USDT essentially serves as a liability certificate for Tether to its holders, but once holders receive USDT, they can use it for payment transactions, effectively allowing USDT to perform the functions of money (similar to M1), which amounts to creating money out of thin air, leading to currency creation. This multiplier effect of currency derivation can drive up asset prices in certain areas, causing inflation in niche sectors (such as crypto assets) and challenging the central bank's monopoly on currency creation. Currently, regulatory frameworks have given little thought to this issue, which merits in-depth study from a financial perspective. This issue was particularly severe in the early cryptocurrency sector, where there were suspicions that Tether was the culprit behind Bitcoin price volatility.
Connecting Two Financial Worlds
Driven by compliance, the GENIUS Act defines stablecoins as payment tools rather than securities, prohibiting interest payments to issuers and granting them M1 currency status. Dollar stablecoins bridge the fiat currency world and the crypto asset world, providing digital payment and settlement mediums for exchanges, decentralized finance, and non-fungible token ecosystems, connecting crypto finance and traditional finance, and reconstructing these two fields.
In cross-border payments, stablecoins have advantages of high efficiency and low cost. Meanwhile, in offline payment scenarios, stablecoins are gradually integrating with Mastercard and Visa cards, allowing users to top up USDT to their Visa cards, linking with WeChat Pay and Apple Pay for consumption in offline settings like roadside barbecue stalls, although transaction fees can be quite high. This trend combines blockchain finance with traditional finance, challenging traditional financial regulatory rules.
VI. The Challenges of Stablecoins to China's Financial Security and Policy Reevaluation
Specific Challenges Facing China
Stablecoins pose numerous challenges to China's financial security. On one hand, there is a potential crisis of mainstream payment systems being marginalized and fiat currencies being replaced. Although China does not face severe inflation like Argentina, dollar stablecoins, relying on blockchain technology to build efficient cross-border payment networks, allow international merchants to directly accept dollar stablecoins, bypassing China's foreign exchange controls and traditional payment systems, making it difficult for the State Administration of Foreign Exchange to monitor foreign exchange fund flows, threatening monetary sovereignty and financial security.
At the same time, stablecoins collaborating with compliant credit card organizations to build global payment channels impact the regulation of existing third-party payment channels in China. Moreover, dollar stablecoins in cross-border payments may undermine traditional payment systems, including the multi-currency bridge and CIPS that China has worked hard to establish.
Additionally, stablecoins relying on blockchain for peer-to-peer cross-border payments may challenge China's financial regulation's "trilemma," simultaneously breaking the three goals of free capital movement, independent monetary policy, and exchange rate management.
Investors can weaken the demand for their local currency by selling it off and hoarding dollar stablecoins, especially when dollar investment yields reach 4%-5% and there are expectations of renminbi depreciation; this conversion behavior becomes more pronounced. The volatility of the cryptocurrency market further exacerbates risks—when the prices of assets like Bitcoin surge, investors may rush to buy Bitcoin by converting large amounts of renminbi into stablecoins. This high yield and automated settlement characteristic not only challenge traditional bank settlement models but also impact exchange rate stability through capital outflows, putting traditional capital control measures at risk of failure.
Reflections on China's Regulatory Policies
In 2021, the central bank and others issued a notice on "further preventing and addressing the risks of virtual currency trading speculation," aiming to strictly prohibit virtual currency trading. While curbing virtual currency speculation risks had significant positive implications at the time, it has led to a long-term institutional vacuum.
From a private law perspective, this does not effectively protect the rights and interests of legitimate stablecoin holders; from a public law perspective, it cannot effectively address issues such as money laundering, terrorist financing, and capital flight brought about by dollar stablecoins. Moreover, the central bank's regulatory policies have produced unexpected "ripple effects." For instance, after the regulatory policy was introduced on September 4, 2017, the direct trading channels between Bitcoin and fiat currencies facilitated by trading platforms were cut off, making trading involving stablecoins and Bitcoin a new choice for investors, leading to a rapid increase in stablecoin usage and a shift in Bitcoin pricing from renminbi to dollars, which was not what regulatory agencies hoped to see.
As the ancients said, "Institutions must be scrutinized, laws must be carefully considered, and state affairs must be handled with caution." The introduction of financial regulatory policies requires careful thought to avoid unexpected consequences from "campaign-style law enforcement."
China's Response Strategies
First, the regulatory mindset needs to shift from a suppressive approach to a collaborative governance concept. Collaborative governance does not involve regulators making decisions alone; for example, the "no-coin blockchain" policy is worth reconsidering. Important stakeholders in stablecoins, such as issuing institutions, authorized participants, cryptocurrency wallet issuers, and cryptocurrency platforms, should converge to jointly discuss regulatory rules and explore a balance between innovation and risk prevention. Currently, Hong Kong's regulatory rules are overly stringent, and the future prospects for locally issued stablecoins may not be optimistic. Initial relevant regulations could be more flexible and moderate.
Second, a monetary firewall should be constructed, and financial counter-sanction capabilities should be enhanced. China could gradually open stablecoins in a phased, layered, and regional manner, using Hong Kong as a testing ground to explore experiences and gradually form future regulatory rules. At the same time, multilateral stablecoin cooperation should be initiated, prioritizing the issuance of offshore renminbi stablecoins, followed by onshore renminbi issuance, to promote the internationalization of the renminbi.
In terms of international governance, China should work with the Bank for International Settlements, the International Monetary Fund, and others to promote the formulation of international rules, enhancing China's voice. Domestically, it is important to enhance regulatory technology, using AI to identify abnormal transactions. Additionally, expanding the application scenarios for renminbi stablecoins is crucial, such as through RWA (real-world assets). Ant Group has successfully issued multiple transactions in Hong Kong, and in the future, on-chain transactions could be directly paid with renminbi stablecoins, opening up development space for renminbi stablecoins.
Conclusion: Seizing Opportunities Amid Challenges
Stablecoins represent the forefront of digital financial development, bringing unprecedented challenges while containing significant opportunities. For China, the key lies in how to prevent risks while not missing the wave of digital financial innovation.
In the context of dollar stablecoins accelerating global expansion through the GENIUS Act, China's response strategy needs to be more intelligent and flexible. On one hand, it must maintain financial security and monetary sovereignty; on the other hand, it should actively participate in this digital financial revolution, finding new breakthroughs for the internationalization of the renminbi in the era of digital currencies.
Future financial competition will not only be a competition between currencies but also a competition of rules and standards for digital currencies. China needs to make its voice heard in this competition, formulating a regulatory framework that aligns with its interests and international trends to secure a favorable position in the new era of digital finance.
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