Stablecoins are a form of private digital currency pegged to a fiat currency, with dollar-denominated variants like USDT and USDC dominating the market. Their operational model resembles that of a "narrow bank," where the issuer’s liabilities (stablecoins) pay zero interest, while the reserve assets held to back them generate yield. The supply of stablecoins is highly elastic, and their circulation is primarily driven by demand rather than issuer incentives. Demand persists despite the opportunity cost of forgone interest because stablecoins offer benefits such as low-cost cross-border payments, convenience for crypto-asset trading, and regulatory arbitrage. The dominance of dollar stablecoins is reinforced by the network effects of the U.S. dollar’s status as the global reserve currency, which stifles competition from stablecoins tied to other currencies. For China, leveraging third-party payment tools (e.g., WeChat Pay, Alipay) in cross-border transactions and advancing central bank digital currency (CBDC) infrastructure are strategic priorities.
Understanding Stablecoins: Key Characteristics
Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging to a specific asset, typically a fiat currency. Today, dollar-backed stablecoins account for over 90% of the total stablecoin market capitalization. They function through both primary markets, where authorized users mint and redeem coins at a 1:1 ratio with the dollar, and secondary markets, where prices can fluctuate based on supply and demand.
Digital Efficiency with Centralized Control
While stablecoins operate on blockchain technology, which theoretically enables decentralization, major issuers like Tether (USDT) and Circle (USDC) retain significant control over issuance, redemption, and reserve management. This results in a hybrid model that combines technological innovation with centralized governance.
Private Money, Not Sovereign Currency
Stablecoins are private liabilities, not government-issued money. Proposed U.S. legislation, such as the GENIUS Act, explicitly prohibits stablecoin issuers from paying interest to holders. Instead, issuers must hold high-liquidity assets equivalent to at least 100% of the stablecoins in circulation, making them a form of private money backed by both the U.S. dollar’s credibility and the issuer’s trust.
The "Narrow Banking" Parallel
Stablecoin issuance mirrors the concept of narrow banking, where institutions hold only low-risk, highly liquid assets to avoid maturity mismatches and credit risks. This model separates money creation from credit allocation, contrasting with traditional banks that engage in fractional reserve lending. In this setup, stablecoins act primarily as payment vehicles rather than tools for credit expansion.
China’s Analogue: Platform Currencies
In China, third-party payment platforms like WeChat Pay and Alipay function similarly to stablecoins. User balances in these systems represent claims on the platforms, which are backed by 100% reserves held at the People’s Bank of China (PBOC). This structure ensures stability and security while limiting financial speculation, making them a regulated alternative to global stablecoins.
Stablecoins as Payment Tools: Cost Benefits and Limitations
Stablecoins have limited adoption in domestic retail payments due to the dominance of established systems like WeChat Pay, Alipay, and Apple Pay. Their potential lies primarily in cross-border transactions, where they offer cost advantages over traditional banking channels.
Lowering Cross-Border Costs
Traditional cross-border payments rely on centralized systems like CHIPS for dollar clearing, which involve high fees and inefficiencies. Stablecoins bypass these structures by leveraging blockchain technology, enabling faster and cheaper transactions. Their competitive market structure, with multiple issuers and blockchain networks, helps keep fees low. Additionally, regulatory arbitrage allows stablecoins to operate with fewer compliance burdens, reducing costs further.
Inherent Limitations
However, stablecoins do not eliminate costs associated with currency exchange. Transactions involving non-dollar currencies still incur fees related to foreign exchange conversion, local banking regulations, and capital controls. The dollar’s dominance as a medium of exchange gives dollar stablecoins a natural advantage, but this does not extend to stablecoins pegged to other currencies.
Supply, Demand, and Drivers of Circulation
Stablecoin supply is highly elastic: issuers profit from the spread between interest-earning reserves and zero-interest liabilities. When interest rates rise, as they did in the U.S. between 2020 and 2025, this spread widens, incentivizing increased issuance. However, circulation is ultimately determined by demand, as holders will not maintain excess balances of a non-yielding asset.
Why Demand Persists Despite Rising Rates
Holders accept zero interest because stablecoins provide compensating benefits:
- Currency Substitution: Users in high-inflation economies may hold dollar stablecoins to preserve value, though this demand is likely limited compared to interest-bearing dollar assets.
- Cross-Border Trade: Stablecoins offer a low-cost alternative for跨境电商 and small businesses engaged in international trade.
- Crypto Trading: Stablecoins serve as the primary medium of exchange and safe haven in volatile crypto markets.
- Regulatory Arbitrage: Their anonymity and cross-border functionality facilitate activities that circumvent capital controls, sanctions, or tax obligations.
Of these, crypto trading and regulatory arbitrage are the most significant drivers of demand today.
Future Potential: Opportunities and Constraints
The growth trajectory of stablecoins hinges on their utility in cross-border contexts, as they offer few advantages over domestic payment systems.
The Dollar’s Network Advantage
The dollar’s incumbency as the global reserve currency creates a powerful network effect, making dollar stablecoins the natural choice for international use. This dominance is reinforced by the depth and liquidity of U.S. financial markets, which provide the safe assets backing stablecoins.
Risks and Vulnerabilities
Despite their growth, stablecoins face several challenges:
- Redemption Risks: Even with 100% reserve backing, stablecoins are vulnerable to bank runs if confidence erodes, as seen during the 2023 SVB collapse when USDC temporarily lost its peg.
- Regulatory Scrutiny: As stablecoins grow, regulators are likely to impose stricter rules to address financial stability and sovereignty concerns.
- Asset Quality Issues: Some issuers, like Tether, hold riskier assets to boost profits, deviating from the narrow banking ideal and increasing systemic risk.
From Crypto Assets to Reserve Assets?
Recent proposals suggest that the U.S. could treat Bitcoin as a strategic reserve asset. However, this idea is economically problematic. Stablecoins are debt-based instruments tied to the dollar, while Bitcoin is a speculative asset with no intrinsic cash flow. Modern monetary systems rely on credit money backed by state authority, not commodity-like assets. Investing in Bitcoin may offer speculative gains but does not provide the stability or liquidity needed for reserve purposes.
Policy Implications and Strategic Responses
Regulatory Imperatives
The tension between stablecoins’ public utility and private profit motives will inevitably lead to tighter regulation. Historical precedent shows that financial innovations are eventually integrated into regulatory frameworks to ensure stability and consumer protection.
Global Currency Competition
The U.S. benefits disproportionately from dollar stablecoins, which extend the dollar’s global reach. Other economies should avoid competing directly by launching their own stablecoins. Instead, they should focus on improving existing payment systems and exploring CBDCs.
China’s Strategic Path
China should prioritize the use of its third-party payment platforms in cross-border trade, leveraging their existing network effects and scale. Additionally, CBDC initiatives can enhance cross-border payment infrastructure through multilateral cooperation. Hong Kong could serve as a testing ground for regulated yuan-backed stablecoins, balancing innovation with financial stability.
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Frequently Asked Questions
What is a stablecoin?
A stablecoin is a type of cryptocurrency pegged to a stable asset, usually a fiat currency like the U.S. dollar. It aims to minimize price volatility by maintaining reserves equivalent to its circulating supply.
How do stablecoins maintain their peg?
Stablecoins use various mechanisms, including holding cash, cash equivalents, or other liquid assets as reserves. Some algorithms adjust supply based on demand, but most major stablecoins rely on full reserve backing.
Are stablecoins safe?
While major stablecoins are generally considered safe, they are not risk-free. Issues like reserve transparency, regulatory changes, and potential bank runs can impact their stability. Always research the issuer’s reserve composition and governance.
Why are dollar stablecoins dominant?
The U.S. dollar’s status as the global reserve currency creates network effects that favor dollar-backed stablecoins. Their widespread acceptance in crypto trading and cross-border payments reinforces this dominance.
Can stablecoins replace traditional banks?
No. Stablecoins function primarily as payment tools and lack the credit creation capabilities of traditional banks. They are more akin to narrow banks that focus on payment services rather than lending.
How do stablecoins affect monetary policy?
Large-scale adoption could complicate monetary policy by creating shadow monetary systems. However, their current impact is limited due to relatively small size compared to traditional financial systems.
Stablecoins represent a significant innovation in digital payments, but their future will depend on regulatory developments and their ability to address genuine economic needs. As the landscape evolves, a balanced approach that encourages innovation while safeguarding financial stability will be essential.