Stablecoins Spark Concern in China’s Financial Strategy

Zhou Xiaochuan, the former Governor of the People’s Bank of China, has raised alarms about the potential threats posed by stablecoins to financial security. His insights were shared during a confidential seminar in July and have now been made public by CF40, a respected think tank, as the Chinese State Council debates integrating stablecoins linked to the yuan into the financial sector.

Is the Involvement of Stablecoins in Finance Overstated?

Zhou, who led China’s central bank from 2002 until 2018, contends that the role of stablecoins in today’s financial landscape is often overhyped. He argued that only a select few financial operations stand to truly benefit from the integration of tokenization and decentralization, suggesting that a reassessment of their necessity is crucial.

China’s existing payment systems, enhanced by QR code technology and NFC-based mobile apps, already ensure efficient and low-cost transactions, Zhou noted. The former governor highlighted how central bank digital currencies (CBDCs) play a pivotal role in further fortifying these systems, leading to operational excellence without the need for decentralized solutions.

Are Stablecoins a Stability Threat Due to Insufficient Reserves?

Zhou voiced concerns over stablecoin issuers potentially creating coins without adequate reserves and the failure of custodians to implement essential safeguards. This lack of supervision, he said, elevates the risk tied to fraud and instability.

Zhou cautioned that even stablecoins backed by full reserves might lead to inflationary pressures through chain transactions, as coins circulate in credit and trading spheres. Such scenarios could deplete reserves far beyond their capacity, posing risks of substantial bank runs, with existing regulations like the U.S. Genius Act falling short of addressing these challenges.

Despite China’s ongoing prohibition on cryptocurrency trading and mining, the examination of yuan-linked stablecoins suggests an alignment with international initiatives. While the U.S. promotes stablecoins to uphold its dollar supremacy, similar policies are noted in Japan and South Korea. Nevertheless, Chinese regulators remain prudently cautious, advising local entities against integrating these digital currencies.

“The actual demand for stablecoins should be questioned considering the advancements in traditional payment systems.”

As the global landscape continues to evolve, China’s cautious approach towards stablecoin adoption reflects a strategic balancing act between innovation and financial security. This stance could shape China’s future role in the digital currency domain while ensuring economic stability is maintained.