Zhu Guangyao: Washington's stablecoin strategy aims to reassert dollar dominance

Former Vice Minister of Finance says Washington's design signals push for regulatory centralisation and a "third phase" of Bretton Woods.

On June 28, Zhu Guangyao, former Vice Minister of Finance (2010-2018), delivered a speech on stablecoins and the U.S.’s ambitions to renew dollar supremacy at the 2025 China Forum on International Affairs, held at the Renmin University of China. The speech transcript was published by Guancha, a Chinese domestic news platform, on its website and WeChat blog on July 10.

The East is Read and its sister newsletter Pekingnology have published a series of articles by Chinese economists on stablecoins, available in our newsletter archives.

朱光耀：美国正试图用稳定币开启布雷顿森林体系第三阶段

Zhu Guangyao: The United States Is Attempting to Launch the Third Phase of the Bretton Woods System Through Stablecoins

Honourable guests, in line with the theme of today’s conference, I would like to give a speech on the evolution of the Bretton Woods system.

2025 marks the 80th anniversary of the victory of the Chinese People’s War of Resistance Against Japanese Aggression and the World Anti-Fascist War. After World War II, the establishment of the United Nations laid the political foundation for the post-war era, which holds great historical significance. At the same time, a year before the end of the war, in July 1944, the historic Bretton Woods Conference was held in Bretton Woods, New Hampshire, USA, laying the foundation for post-war economic recovery and development.

This conference established the International Monetary Fund, the World Bank, and the predecessor of the World Trade Organisation, the General Agreement on Tariffs and Trade (GATT), creating the post-World War II economic order. These institutions are all specialised agencies of the United Nations. As an important member of the Allied Powers, China was both a participant in and a contributor to the establishment of the Bretton Woods system.

The study of the establishment and evolution of the Bretton Woods system, including the role of stablecoins, should be situated within the broader context of global political and economic dynamics. It should examine the current scale of the world economy, the development levels and trade conditions of major economies, as well as cross-border capital flows and the overall state of international financial settlements. Data on the international economic situation is drawn from the IMF, trade conditions from the WTO, and capital flows from the BIS—all of which are authoritative sources.

In 2024, the total size of the global economy reached USD 110 trillion, with China and the United States remaining the world’s two largest economies. The United States led with a GDP of USD 29.17 trillion, followed by China at USD 18.27 trillion. According to data released by China’s National Bureau of Statistics, China’s GDP in 2024 was RMB 134.9 trillion, which converts to USD 18.27 trillion. China thus ranks as the world’s second-largest economy.

Apart from China and the United States, no other economy currently exceeds USD 5 trillion in size. Germany ranks third with a GDP of USD 4.17 trillion, followed by Japan at USD 4.07 trillion, and India in fifth place with USD 3.9 trillion. India has set ambitious targets, with Prime Minister Modi stating that the country aims to rapidly reach a USD 5 trillion economy and eventually become the world’s second-largest. He did not, however, specify which country would hold the top position at that time.

From a trade perspective, total global trade in 2024 reached USD 65 trillion, comprising USD 49 trillion in goods and USD 16 trillion in services. Trade volumes of China and the United States remained roughly equal.

In 2024, China’s services trade surpassed USD 1 trillion for the first time, while its goods trade, at USD 6.2 trillion, continued to rank first globally for several consecutive years. Combined, China’s goods and services trade totalled USD 7.2 trillion.

The United States’ goods trade, totalling USD 5.4 trillion, ranked second after China. However, its services trade surpassed China’s, reaching USD 1.9 trillion. The combined value of U.S. goods and services trade stood at USD 7.3 trillion, compared to China’s USD 7.2 trillion, making the trade volumes of the two countries virtually equal. Each accounts for approximately 11% of global trade, which is why the WTO notes that U.S. tariff policies affect only about 10% of global trade.

According to BIS data, global capital flows in 2024 reached USD 250 trillion, far exceeding global GDP and trade volumes. Notably, stablecoin transactions totalled USD 27.6 trillion, surpassing the combined transaction volumes of MasterCard and Visa. This figure comes from Deutsche Bank.

Analysing data on the global economy, trade, and capital flows reveals a clear picture: the United States still accounts for over 25% of global GDP. However, this represents a sharp decline from 1945, when, at the end of World War II, it accounted for 56% of the world’s economic output.

It was precisely because the United States held an absolute advantage at that time that the post-war global financial system was dollar-dominated. The Bretton Woods system was established based on the U.S. dollar, and one of its key foundations in 1944 was the peg of 1 ounce of gold to 35 USD.

However, by 1971, the relative decline in the U.S. economic strength made it impossible for the U.S. to maintain the commitment of 1 ounce of gold to 35 USD, leading to the decoupling of the dollar from gold. This, famously known as Nixon’s default, marked the end of the first phase of the Bretton Woods system.

The decoupling of the dollar from gold did not equate to the collapse of the Bretton Woods system, as the IMF and the World Bank remained operational. In the early to mid-1970s, the oil crisis triggered a sharp rise in oil prices, jolting the global economy and raising questions about which currency should be used for oil settlement. This led to the emergence of the petrodollar. The anchoring of oil pricing to the U.S. dollar and the injection of liquidity into international capital markets marked the beginning of the Bretton Woods system’s second phase.

Today, the second phase of the Bretton Woods system is no longer sustainable, with the core issue being the unsustainable level of U.S. national debt. In January, the U.S. national debt exceeded USD 36 trillion; by March, it had risen to USD 36.2 trillion. It now stands at over 124% of GDP. Ray Dalio, founder of Bridgewater Associates, explicitly warned that once a nation’s debt-to‑GDP ratio exceeds about 135%, servicing that debt can absorb approximately 40% of fiscal revenue, pushing the country’s finances to the brink of collapse.

A prominent American historian has also acknowledged that, throughout world history, no empire has been able to endure once interest payments on its national debt surpass military spending. In 2024, U.S. interest payments exceeded USD 1 trillion, while defence spending stood at USD 895 billion. Coupled with a trade deficit of over USD 1 trillion, these two trillion-dollar burdens place enormous strain on U.S. public finances.

Of course, as the world’s largest economy and the largest military power, the United States is also trying every possible means to deflect the crisis. From an economic perspective, it is essential to closely examine the current situation in the U.S., particularly the four key economic and financial measures implemented in June.

The first measure was the U.S. Treasury’s buyback of 10 billion USD in government bonds on June 3. While such buybacks have occurred in the past, the scale of this operation was unprecedented. A second buyback of USD 10 billion followed on June 10, reflecting the Treasury’s assessment that the pressure from the national debt is severe enough to warrant such intervention.

The Federal Reserve has maintained the benchmark interest rate at 4.25% to 4.5%, remaining firm in its commitment to managing the significant uncertainty caused by tariff policies and containing inflationary pressures.. This decision drew sharp criticism from President Trump, who argued that keeping rates unchanged forces the U.S. to incur an additional USD 900 billion in annual costs and that a rate cut of at least 3% would significantly ease this financial burden. Nonetheless, the Federal Reserve has stood firm, maintaining its monetary policy stance in response to ongoing tariff-related uncertainties. As a result, the U.S. Treasury has been compelled to intervene.

The second measure is that, although the Federal Reserve has not altered its monetary policy, it has made significant adjustments to its regulatory policy in coordination with the U.S. Treasury. On June 25, the Federal Reserve Board approved a key resolution by a 5–2 vote to revise the enhanced supplementary leverage ratio (eSLR).

Following the 2008 global financial crisis, Basel III introduced a series of regulatory measures to strengthen oversight of the financial system, particularly for banks deemed “too big to fail.” One key measure was the supplementary leverage ratio (SLR). The basic concept is as follows: Tier 1 capital—including common equity and retained earnings—serves as the numerator, while the denominator includes all of a bank’s asset exposures, such as loans, government bond holdings, and deposits at the Federal Reserve.

The minimum SLR is set at 3% and applies to all major banks—specifically, those with assets exceeding USD 250 billion. For globally systemically important banks (GSIBs), commonly referred to as “too big to fail,” the required ratio is higher, at 5%, and is known as the enhanced supplementary leverage ratio (eSLR). During the 2020 pandemic, the Federal Reserve temporarily eased this rule by excluding U.S. Treasury securities from the denominator. However, this exemption lasted only one year and was reinstated after 2021.

Now, this key resolution passed by the Federal Reserve on June 25 aims to revise its regulatory policy to exclude U.S. Treasuries from risk exposure, effectively releasing at least USD 1 trillion in liquidity. At the same time, the Fed has invited public comment on whether reserves at Federal Reserve Banks should be excluded from future calculations, which, by my estimate, could unlock an additional USD 1 trillion.

The third measure is an adjustment to the accounting treatment. The gold held by the U.S. government—over 8,300 metric tons—is currently recorded on the Treasury’s balance sheet at the statutory rate of $42.22 per ounce, a valuation that has remained unchanged since 1973. In contrast, the market price of gold now exceeds $2,400 per ounce. Revaluing these reserves to market prices would unlock an additional USD 1 trillion. However, whether it will be used entirely for purchasing Bitcoin, as Trump suggested, is still being studied by the U.S. side. Nonetheless, adjusting the accounting standards is indisputable.

The U.S. government continues to record its gold reserves at $42.22 per ounce, a value established in 1973 and unchanged since, for a reason. On the U.S. Treasury’s balance sheet, gold appears as an asset. On the Federal Reserve’s balance sheet, meanwhile, gold is recorded as liabilities, reflecting an internal transfer. If valued at current market prices, the United States’ gold holdings of over 8,300 metric tons would be worth nearly one trillion USD.

The three adjustments outlined above are tactical. A strategically significant shift occurred on June 17, when the U.S. Senate passed the GENIUS Act. The U.S. President, Vice President, and Treasury Secretary all issued policy statements.

Trump stated that the Senate’s passage of the GENIUS Act would “make America the UNDISPUTED Leader in Digital Assets.” He urged the House of Representatives to pass the bill “LIGHTNING FAST”. According to the legislative agenda, the House is expected to begin deliberations as early as the week of July 7. Trump called on the House to deliver the legislation to his desk without delay, aiming for implementation by August 1.

Vice President Vance further stated that USD-backed stablecoins will become “a force multiplier of our economic might,” and that through blockchain payment systems, the U.S. dollar will circulate more efficiently and at a lower cost, thereby maintaining the global dominance of the dollar.

Treasury Secretary Bessent stated that “this administration is committed to keeping the reserve currency status and enhancing that,” and that stablecoins backed by U.S. Treasury bonds or short-term Treasury bills will create a market that expands the global use of the dollar, while also lowering the government’s borrowing costs and effectively controlling national debt.

Statements from key U.S. officials on stablecoins clearly reveal the country’s policy objectives. These align closely with my research on the third phase of the Bretton Woods system. U.S. policy centres on preserving the dollar’s status as the global reserve currency, maintaining dollar supremacy, and tightly linking stablecoins to national power and efforts to reduce the cost of servicing the national debt. Let me now briefly examine the key characteristics of U.S. stablecoins.

First, all issued U.S. dollar stablecoins must be fully backed by U.S. dollars at a 1:1 ratio. Furthermore, the assets backing these stablecoins can only be U.S. dollar cash and U.S. Treasury securities with maturities of 93 days or less.

To clarify: the requirement for Treasuries with maturities of 93 days or less is not because longer-term securities are not allowed, but because shorter maturities ensure higher liquidity. Demand deposits and money market fund shares are typical examples of highly liquid U.S. dollar assets.

In my view, this design reflects the emergence of a third phase in the Bretton Woods system, one in which U.S. dollar stablecoins are backed by highly liquid, dollar-denominated assets. This is a defining feature of the current framework. Moreover, the system mandates strict regulatory oversight by U.S. authorities and requires that issuing entities be based in the United States.

Currently, Tether (USDT), the largest stablecoin by issuance volume, is based in El Salvador. While this may be tolerated during a transitional period, it will need to be brought into compliance afterwards. Specifically, it must meet U.S. registration requirements and adhere to all applicable U.S. regulatory policies. This exemplifies the exercise of long-arm jurisdiction under the new regulatory landscape and underscores the strategic importance of U.S. dollar stablecoins to the United States.

It is essential to closely examine the development process of USD-backed stablecoins. Several years ago, Facebook proposed issuing Libra, a digital currency backed by a basket of currencies modelled on the IMF’s Special Drawing Rights (SDR). The United States strongly opposed the initiative while also actively studying central bank digital currencies (CBDCs). The Republican Party’s campaign platform has taken a clear stance against CBDCs. After taking office, Trump signed an executive order explicitly prohibiting the issuance of a central bank digital currency in the United States.

While it is clear that the strategic purpose behind the United States’ promotion of stablecoins—closely tied to U.S. dollar liquidity—is to preserve dollar supremacy, it is equally important to recognise that the rise of stablecoins aligns with broader trends in technological revolution and innovation. Technological innovation and advancement are the key driving forces and fundamental pillars supporting the creation of USD-backed stablecoins.

With the advancement of blockchain technology, Real-World Assets (RWAs) have emerged as a focus of innovation, offering a broad range of application scenarios. RWAs refer to tangible assets or those with clearly defined legal rights outside the digital realm, such as real estate, stocks, bonds, and receivables. They possess real economic value and form a foundational pillar of the traditional financial system.

The core of RWA digitisation lies in the use of blockchain to convert these real-value assets into digital tokens, a process known as asset tokenisation. This enables traditional assets to be traded, transferred, and managed on-chain, marking a profound transformation of the financial system.

Stablecoins serve all the core functions of payment, circulation, and settlement in transactions. Enabled by the decentralised nature of blockchain technology, they allow parties to transact directly without relying on intermediaries. However, while blockchain itself is inherently decentralised, the United States has effectively imposed a high degree of centralisation on U.S. dollar stablecoin issuance through a series of legal and regulatory constraints.

This should not be misunderstood, and I urge Chinese experts to stop characterising this system as decentralised. In reality, it is highly centralised—a triumph of centralisation. This evolution demands close attention.

The issuance and regulation of fiat-collateralised stablecoins, whether pegged to the U.S. dollar or other currencies, is not a victory for decentralised finance, but a success of sovereign authority. It poses a significant challenge to governments around the world: how should they respond?

If the United States retains its dominant position, it will have effectively secured control over the third phase of the Bretton Woods system. In light of this, strong domestic policy responses and robust international coordination are urgently needed.

That’s all for my thoughts today. Thank you!

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