Guan Tao warns over-expectation of stablecoins

Chief Economist with Bank of China International Securities says the idea of achieving currency internationalisation through stablecoins as a shortcut is largely illusory.

Now we’ve come to the fifth in a series of articles to explore the ongoing discussions surrounding stablecoins in China, written by Guan Tao, Chief Economist with Bank of China International Holdings Co., Ltd (BOCI) Securities and former Director-General of the Balance of Payments Department of China’s State Administration of Foreign Exchange (2009-2015).

So far, The East is Read has shared three discussions on the topic, with one more article published on Pekingnology, our sister newsletter.

This article is scheduled for publication in China Forex, Issue 15, 2025, a magazine under the auspices of the State Administration of Foreign Exchange (SAFE) on August 1, and was made available on July 4 on the magazine’s official WeChat blog.

—Yuxuan Jia

管涛：不排斥但也不要神话稳定币

Guan Tao: Don’t Reject Stablecoins, But Don’t Mythologise Them Either

Recently, the passage of stablecoin legislation in the U.S. and Hong Kong, the listing of Circle as the first stablecoin issuer to go public, and China’s announcement to establish an international operation centre for e-CNY in Shanghai have reignited debate over the role of stablecoins.

Some argue that the adoption of stablecoins could enhance the efficiency of cross-border payments and settlements, even suggesting that the identity of the issuer and the choice of the pegged currency will play a decisive role in shaping that currency’s future standing in the international monetary system. Others contend that the U.S. requirement for domestically issued stablecoins to be backed 1:1 by U.S. dollar cash or short-term Treasury bonds will create a new cycle of “USD → USD stablecoin → U.S. Treasury bonds,” thereby enabling the U.S. to manage its debt more effectively and reinforce dollar hegemony.

In my view, however, stablecoins represent more of a technological rather than monetary innovation. While new payment technologies, including stablecoins, may improve the efficiency of cross-border transactions, they are unlikely to alter the multipolar evolution of the international monetary system or fundamentally shift the trajectory of internationalisation for emerging currencies.

1. Stablecoins: more technological than monetary

The stablecoins legislatively endorsed by the U.S. and Hong Kong are value-based, decentralised tokens pegged to fiat currencies, differing from China’s earlier account-based, centralised central bank digital currency (CBDC). Nevertheless, the two share considerable comparability. As former People’s Bank of China (PBOC) Governor Zhou Xiaochuan noted, CBDC consists of digital currency (DC) and electronic payment (EP)—a framework that stablecoins also follow.

Current discussions on stablecoins largely focus on their tokenised nature. The prevailing assumption is that the programmability and tradability enabled by blockchain require fiat currencies to be rebranded as new monetary units in order to realise peer-to-peer and payment-versus-payment (PvP) efficiency in cross-border transactions.

However, once stablecoins are brought under regulation, fully backed by fiat at a 100% reserve ratio, and digital fiat achieves legally recognised ownership according to the right of possession, then in distributed ledger technology (DLT) applications, the renaming of monetary units becomes irrelevant to their functions.

The recently launched cross-border payment connect between mainland China and Hong Kong offers a compelling case for analysing improvements in cross-border payment efficiency.

By linking the mainland’s Internet Banking Payment System (IBPS) and Hong Kong’s Faster Payment System (FPS), the payment connect will support participating institutions to provide efficient, convenient and safe cross-border payment services for residents in both the mainland and Hong Kong.

According to the PBOC, the payment connect with Hong Kong is designed as a small-amount, people-centred service, allowing participating institutions to process cross-border remittances under current account transactions for residents of both regions. Each side has designated six local banks to offer simplified remittance services for individuals, with no requirement to submit transaction background information for transfers within specified limits. The service also facilitates two-way, user-friendly financial transactions such as tuition payments, medical expenses, and the disbursement of salaries and allowances.

Compared with traditional cross-border remittances, the payment connect with Hong Kong significantly shortens the remittance chain and improves efficiency in three key areas. First, it enables users to initiate cross-border RMB and HKD transfers between the mainland and Hong Kong via mobile banking, online banking, and other channels offered by participating institutions, using mobile phone numbers or bank account information. Second, it supports real-time settlement of remittances within designated limits under current account transactions. Third, the direct linkage between payment infrastructures reduces intermediaries and lowers the cost of cross-border transfers.

At the same time, to guard against potential risks such as money laundering, terrorist financing, and proliferation financing, mainland institutions are required to comply with regulations on cross-border fund settlement and fulfil relevant legal compliance obligations.

The service officially launched on June 22, 2025, with successful transactions completed in both regions. Although the launch took place on a Sunday, when bank branches were closed, customers were unaffected thanks to off-counter access via bank apps and mobile banking. Importantly, these transactions did not involve stablecoins but instead used funds held in bank accounts, following an “account-based” rather than “value-based” payment model.

This goes to show that multiple technological pathways exist for improving cross-border payment efficiency. According to the PBOC, the mainland’s fast payment system underlying the payment connect is the Internet Banking Payment System (IBPS), launched in 2010, which likely does not yet incorporate blockchain or distributed ledger technology (DLT). That said, there are no technical or legal barriers preventing banks from adopting blockchain.

For example, in September 2018, the Digital Currency Institute of the PBOC and the PBOC Shenzhen Branch jointly launched the Greater Bay Area Trade Finance Blockchain Platform. This platform provides an open, trustworthy, secure, standardised, compliant, efficient, non-profit, and shared blockchain infrastructure for the registration, custody, trading, and circulation of trade finance assets. It stands as a practical application of blockchain in supply chain finance, although the blockchain’s relatively slow processing speed under high transaction concurrency may restrict its applicability in certain use cases.

At the same time, blockchain technology does not inherently require anonymous or untraceable transactions. As a payment innovation born from the decentralised design of Bitcoin, blockchain’s distributed ledger operates on a “value-based” rather than “account-based” model—using consensus algorithms (i.e., “mining”) to enable anonymous verification that aligns with the right of possession. However, when blockchain is applied to support traditional finance, the need for anonymity should be carefully assessed and only retained where explicitly justified. Transitioning from account-based to value-based payment systems should pose no fundamental technological barriers.

Furthermore, the successful implementation of the payment connect relies on the interconnection between mainland and Hong Kong payment systems, which requires close coordination among financial regulators across jurisdictions. By comparison, once regulated, stablecoins must obtain licenses, build technical infrastructure, and acquire users in each target market. In this regard, the payment connect holds a clear advantage in customer acquisition costs, as it leverages banks’ existing customer bases. This very advantage has become a key driver behind the accelerating convergence between stablecoins and the traditional financial system.

At the 2025 Lujiazui Forum, People’s Bank of China Governor Pan Gongsheng assessed the diversification of cross-border payment systems from a technological standpoint. He noted that, underpinned by new technologies such as blockchain and distributed ledger, central bank digital currencies and stablecoins are thriving, making possible the simultaneous processing of payment and settlement. The development has fundamentally reshaped the traditional payment landscape and significantly shortened the cross-border payment chain. It, however, has also posed great challenges to financial regulation. Technologies, such as smart contracts and decentralised finance, will further promote the evolution and development of cross-border payment systems.

The Bank for International Settlements (BIS) also adopts a “dual approach” toward stablecoins. On one hand, the BIS argues that stablecoins struggle to perform three of the fundamental functions of money—as a means of payment, store of value or unit of account. It also criticises their opaque operational structures and weak regulatory oversight, much like private banknotes circulating in the 19th-century Free Banking era in the United States. On the other hand, the BIS advocates for a transition by central banks to a tokenised monetary system built on a “unified ledger” architecture. This framework would integrate central bank reserves, commercial bank money and government bonds into a single, programmable platform, enabling near-instantaneous settlement of both payments and securities transactions, lowering the time costs of traditional verification processes, and unlocking new functional possibilities for financial markets.

2. Stablecoins unlikely to change multipolar trajectory in the international monetary system

At the 2025 Lujiazui Forum, People’s Bank of China Governor Pan Gongsheng further noted that the international currency, if dominated by the sovereign currency of a single country, has three inherent instabilities. First, a sovereign currency issuer tends to prioritise its own interests over the supply of global public goods when its own interests conflict with the attribute as a global public good. Second, fiscal and financial regulatory issues of a sovereign currency issuer and the accumulation of structural problems in its domestic economy may generate financial risks with spillover effects, or even escalate into a global financial crisis. Third, in times of geopolitical tensions, national security concerns, or even wars, the global dominant currency tends to be instrumentalised or weaponised.

Governor Pan noted that one evolutionary direction for the international monetary system is multipolar development—specifically, weakening the excessive reliance on a single sovereign currency and its negative impacts, fostering healthy competition among a few strong sovereign currencies, and putting in place incentive-restraint mechanisms.

The three aforementioned sources of instability cannot be resolved through the introduction of stablecoins. This is because stablecoins pegged to sovereign currencies derive their credibility from the very currencies to which they are linked. As such, they are inherently unable to give rise to a supra-sovereign international monetary system.

The BIS recently released a report stating that while stablecoins show some potential in the context of tokenisation, they continue to exhibit fundamental shortcomings. Specifically, stablecoins fail to meet the three key tests for viability as the backbone of the monetary system: singleness (the ability to settle payments at par, i.e., at full value), elasticity (the ability to discharge obligations in a timely manner and prevent payment system gridlock), and integrity (the ability to prevent illicit activity). The BIS further warned that, without adequate regulation, stablecoins may pose risks to both financial stability and monetary sovereignty.

The notion that stablecoins could help the U.S. government manage its debt and consolidate dollar hegemony is probably overly simplistic. While pegging stablecoin issuance to short-term Treasury bonds may indeed boost demand for U.S. debt and marginally reduce the government’s financing costs, these debts must ultimately be repaid.

More critically, if the United States continues down the path of unsustainable fiscal expansion, it could still trigger a sovereign debt crisis. The collapse of the Bretton Woods system stands as a recent historical precedent.

In the 1960s, under the combined pressures of the Great Society programme and the Vietnam War, the United States ran persistent balance of payments deficits, leading to dollar depreciation and outflows of gold reserves. During this period, initiatives such as the Gold Pool and the creation of Special Drawing Rights (SDRs) were introduced in an attempt to ease the United States’ Triffin Dilemma. However, by the early 1970s, the U.S. deficit had continued to widen, and the economy had slipped into stagflation.

Against this backdrop, in August 1971, the Nixon administration unveiled a package of economic measures, most notably suspending the convertibility of the dollar into gold for foreign central banks. This decoupling marked a de facto sovereign default by the United States, undermining the Bretton Woods system and ultimately leading to its collapse in 1973.

What currently undermines the credibility of the U.S. dollar is U.S. government policy. The introduction of stablecoins does not alter the country’s macroeconomic policy orientation, particularly since U.S. regulations require stablecoins to be backed 1:1 by reserves, effectively creating a narrow banking model without money creation capabilities.

This mirrors the pre-SWIFT era, when banks relied on telex to conduct cross-border fund transfers, a system that was slow, costly, and prone to errors. It was only with the launch of SWIFT in the early 1970s that banks acquired a secure, reliable, efficient, standardised, and automated messaging infrastructure for cross-border payments, greatly improving international settlement efficiency and facilitating global trade and financial modernisation and standardisation.

Yet today, few countries take SWIFT into account when setting domestic economic policy—unless their major banks risk exclusion from the system, in which case the consequences can be local financial turmoil or even crisis.

The erosion of U.S. dollar credibility stems primarily from three factors: first, aggressive U.S. tariff policies that have triggered a restructuring of global trade and the international monetary system; second, expansionary fiscal policies that have raised concerns about the sustainability of U.S. government debt; and third, government interference in interest rate decisions, which has compromised the Federal Reserve’s independence.

Since April 2025, recurring turmoil in the U.S. Treasury market has been marked by spikes in bond yields that frequently coincide with stock market volatility and sharp dollar depreciation—an unusual “triple whammy” across stock, bonds, and currency markets. This phenomenon not only reflects how rising recession fears have overturned traditional safe-haven logic, but more importantly, it underscores how U.S. government policy has fundamentally disrupted the “rules of the game” that underpin the U.S. dollar hegemony. These are structural problems that USD-backed stablecoins cannot fix.

Moreover, with persistent inflation and an uncertain fiscal outlook driving heightened Treasury yield volatility, U.S. government debt has increasingly shifted from being a safe asset to a source of risk. As the Silicon Valley Bank crisis illustrated, stablecoins backed by Treasuries may ultimately fail to deliver the very stability they are meant to provide.

The idea of achieving currency internationalisation through stablecoins as a shortcut is largely illusory. First, the blockchain technology underlying stablecoin operations is typically open-source, meaning there are no technological “bottlenecks” preventing other countries from adopting it. Also, foundational technologies like blockchain and distributed ledgers are non-exclusive. Any nation with the interest and capacity can utilise them. Even if a currency gains a temporary first-mover advantage by pioneering stablecoin issuance, this does not preclude other currencies from catching up or even surpassing it through subsequent adoption.

Second, the international acceptance and credibility of a currency depend far more on the issuing country’s overall national strength than on any specific technology. If a currency lacks global recognition, it is unrealistic to expect stablecoins pegged to it to enjoy greater international credibility.

That said, in the context of a multipolar international monetary system, major global currencies do compete. If traditional reserve currencies develop more advanced payment technologies than emerging market currencies, this could reinforce network effects and path dependency, entrenching the usage and holding of traditional reserve currencies while further constraining the ability of emerging market currencies to close the gap.

Overall, cross-border payment and remittance services continue to face major pain points, including slow processing time and high transaction costs. In recent years, the international community has actively explored the use of emerging technologies such as CBDCs and stablecoins to improve efficiency, shorten processing times, and reduce costs in cross-border transactions.

China should adopt an open attitude toward new technologies—willing to accept, yet prudent in experimentation—without prematurely dismissing any potential technical pathways. As these technologies are designed to enhance traditional financial services, activities involving them—even when directed at general industrial and commercial enterprises—should fall within the scope of financial regulation to prevent disintermediation.

The introduction of locally developed payment innovations should prioritise the simple over the complex, the easier over the harder, and pilot before scaling. Forward-looking research is also needed to explore how to manage the inflow of foreign-issued stablecoins into the domestic market.

At the same time, it is essential to maintain a clear-eyed view of stablecoins, avoiding the mythologising of their potential and the exaggeration of their role in reshaping the international monetary system or promoting currency internationalisation. Strategic resolve is crucial. Above all, one must avoid blindly embracing stablecoins while overlooking their risks, particularly the danger of them becoming profit-driven financial instruments. Continuous regulatory oversight, consumer education, and protection of consumer rights must remain top priorities.

Wang Yongli: The rapid development of USD-backed stablecoins offers a profound warning