Stablecoins, primarily used for trading crypto assets, facilitating cross-border payments, and in black/gray market activities, leverage significant technological advantages. However, due to operational constraints, they struggle to independently evolve into the next generation of money. For China, stablecoins notably mismatch with its domestic financial system, whereas the tokenization of existing monetary systems holds greater potential. In offshore markets, however, promoting the internationalization of the digital yuan, developing digital currency bridges, and encouraging yuan-denominated stablecoins could accelerate RMB globalization and explore the construction of a tokenized financial ecosystem.
Current Primary Uses of Stablecoins
We identify three main uses for existing stablecoins, with cross-border payments and crypto asset purchases benefiting from U.S. regulatory developments like the proposed "Genius Act."
Stablecoins are primarily cryptocurrency tokens pegged to the U.S. dollar or dollar-denominated assets, essentially functioning as private forms of money. Their advantages stem from blockchain and distributed ledger technology, which offer enhanced privacy, lower transaction costs, and faster settlement times. Consequently, stablecoins are widely used for trading cryptocurrencies and other digital assets, cross-border remittances, and illicit or gray market transactions. As regulatory frameworks, such as those potentially advanced under new U.S. administrations, formalize cryptocurrency operations, the use cases for crypto trading and cross-border payments are likely to expand rapidly. Although illicit uses may diminish, stablecoins are unlikely to independently become the next monetary standard.
Key Challenges Preventing Stablecoins from Becoming Next-Generation Money
Despite their advantages and growing application scenarios, stablecoins face several critical issues that hinder their potential as a future monetary system:
- Profitability Sensitivity to Interest Rates: The profitability of private stablecoin issuers is highly sensitive to interest rate fluctuations. During easing cycles, sustaining profitability becomes challenging. The prevailing model involves issuers holding reserves without paying interest to users in exchange for service provision.
- Limited Interoperability: Stablecoins lack seamless interoperability and universal circulation capabilities. Issued by private entities on often isolated blockchains, they face inherent barriers to frictionless exchange—reminiscent of historical private banknotes or silver certificates.
- Constrained Money Creation: Stablecoins have limited money creation capabilities and inelastic supply, unlike traditional commercial banking systems that act as economic stabilizers. They can only serve as supplements to bank-generated money.
- Regulatory and Compliance Hurdles: The emphasis on privacy in stablecoin transactions poses significant challenges for financial compliance, particularly in regulating capital flows within developing economies.
Mismatch with China's Domestic Financial System
Stablecoins are ill-suited for direct integration into mainland China’s financial framework due to several fundamental mismatches. Instead, advancing the digital yuan (e-CNY) within the existing system appears more viable:
- State-Dominated Banking System: China's banking sector is predominantly state-owned, providing a higher inherent credit tier than private stablecoins, which would struggle to compete.
- Lacking Use Case Scenarios: The three primary current uses of stablecoins have no significant foothold or application within mainland China.
- Tokenization via Existing Tools: Tokenization needs are better met by current monetary instruments. The digital yuan and multi-central bank digital currency (CBDC) bridge projects can leverage distributed ledger advantages in cross-border payments while ensuring regulatory compliance.
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Opportunities in Offshore Markets
In offshore markets, multiple measures can accelerate RMB internationalization, such as promoting offshore yuan-backed stablecoins, advancing the digital yuan, and pioneering next-generation financial system pathways.
The formalization of dollar-based stablecoins could slow current de-dollarization trends, making the push for RMB internationalization more urgent. Beyond traditional methods, internationalizing the digital yuan and developing CBDC bridges can proceed concurrently. The digital yuan’s role may shift toward wholesale applications. Simultaneously, fostering offshore RMB stablecoins, along with developing offshore digital bond markets and RMB-based real-world asset (RWA) tokenization, could attract foreign assets into the broader RMB ecosystem.
Frequently Asked Questions
What are stablecoins primarily used for?
Stablecoins are mainly used for trading cryptocurrencies, enabling cross-border payments, and, unfortunately, facilitating transactions in black and gray markets. Their technological benefits include lower costs and faster settlement times.
Why can’t stablecoins become the next form of money?
Key limitations include sensitivity to interest rate changes, poor interoperability between different stablecoin systems, limited capacity for money creation, and significant regulatory challenges due to their inherent privacy features.
How does China’s financial system differ regarding stablecoins?
China’s state-dominated banking system offers higher trust levels than private stablecoins. Moreover, current stablecoin applications have little relevance domestically, where official digital currency initiatives like the e-CNY are prioritized.
What is the digital yuan’s role in cross-border payments?
The digital yuan, combined with multi-CBDC bridge projects, can utilize blockchain technology for efficient cross-border transactions while maintaining regulatory oversight and compliance.
What are the risks associated with stablecoins?
Major risks include unexpected regulatory changes, financial non-compliance, macroprudential监管 challenges, and geopolitical uncertainties affecting adoption and stability.
How might offshore RMB stablecoins help?
Offshore RMB stablecoins could enhance RMB internationalization by facilitating easier access to yuan-denominated assets, supporting digital bonds, and expanding real-world asset tokenization in global markets.
Risk Factors
Potential risks include faster-than-expected legalization of stablecoins in the U.S., financial compliance issues, macroprudential regulatory concerns, and geopolitical tensions.
This article is adapted from a research report published by CITIC Securities on July 3, 2025. For detailed analysis and risk disclosures, please refer to the original document.