Stablecoins have become a focal point of global financial discussion, especially amid shifting U.S. tariff policies and declining confidence in the dollar. At the 2025 Lujiazui Forum, experts debated whether dollar-backed stablecoins are a natural evolution of digital finance or a disruptive force challenging monetary sovereignty. To unpack this complex landscape, Sun Lijian, Director of the Financial Research Center at Fudan Development Institute, offers a comprehensive analysis of stablecoin mechanics, global implications, and strategic responses—particularly for China.
What Are Stablecoins? Understanding the Basics
Stablecoins are cryptocurrencies designed to maintain a stable value by pegging to an external asset, typically the U.S. dollar. Unlike volatile assets like Bitcoin—known for price swings of around 20%—stablecoins aim for minimal fluctuation (often within 0.5%), making them ideal for payments, settlements, and hedging rather than speculation.
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There are three primary types:
- Fiat-backed stablecoins (e.g., USDT, USDC): Each token is backed by reserves of cash or short-term U.S. Treasuries.
- Crypto-collateralized stablecoins (e.g., DAI): Backed by over-collateralized digital assets like Ethereum, managed via smart contracts.
- Algorithmic stablecoins: Use code-driven supply adjustments to maintain parity; however, this model proved fragile when Terra’s UST collapsed in 2022, wiping out $40 billion in value.
The stability mechanism hinges on transparency and reserve integrity. For instance, Circle’s USDC maintains full disclosure with monthly audits and a reserve ratio exceeding 100%. In contrast, Tether (USDT) has faced scrutiny over reserve composition but has improved transparency, with cash holdings now accounting for 82% of reserves.
Core Functions and Real-World Applications
Stablecoins serve four critical roles in today’s digital economy:
- Safe Haven in Crypto Markets
During market downturns, traders flock to USDT or USDC. Binance recorded a single-day inflow of $4.3 billion into stablecoins during a Bitcoin crash in 2024. - Efficient Cross-Border Payments
In the Philippines, migrant workers use USDT for remittances at just 0.1% fees—dramatically lower than the global average of 6.3% charged by traditional banks (World Bank, 2024). - Infrastructure for DeFi
On platforms like Uniswap, 80% of trading pairs involve dollar-pegged stablecoins such as USDC, enabling seamless liquidity and price discovery. - Inflation Hedge
In high-inflation economies like Argentina (annual inflation: 289% in June 2024), citizens convert wages into USDT to preserve purchasing power.
How Stablecoins Impact the Global Monetary System
1. Reinforcing Dollar Dominance
Stablecoins act as a digital extension of the U.S. dollar. By converting global capital into dollar-denominated tokens, they effectively expand America’s “digital seigniorage.” The proposed GENIUS Act (passed by the U.S. Senate in June 2025) mandates that stablecoin issuers hold 1:1 reserves in cash or short-term Treasuries, further integrating stablecoins into the U.S. financial system.
This trend accelerates digital dollarization, especially in countries with unstable currencies. In Argentina and Turkey, over 30% of crypto users hold stablecoins as savings (IMF, 2024). Meanwhile, Venezuela saw $2.4 billion in capital flight via USDT in 2023 (Chainalysis), undermining local monetary policy.
2. Distorting Financial Markets
Stablecoin reserves increase demand for short-term U.S. debt, influencing Treasury yields. Inflows can suppress 3-month T-bill rates, while outflows spike volatility—potentially weakening the Federal Reserve’s control over monetary transmission.
The 2023 Silicon Valley Bank collapse caused USDC to briefly depeg to $0.87, triggering $620 million in DeFi liquidations within 24 hours. Additionally, interest-bearing stablecoins once posed disintermediation risks to banks—now mitigated by the GENIUS Act, which prohibits yield payments.
3. Challenging International Monetary Order
While 99% of fiat-backed stablecoins are dollar-pegged and dominate 90% of cross-border crypto payments (BIS), this centralization creates systemic vulnerabilities. The “digital trilemma” emerges: fixed exchange rate (peg), open capital mobility (instant transfers), and independent monetary policy cannot coexist without risk.
If confidence in U.S. fiscal health erodes, mass redemptions could trigger fire sales of Treasuries—destabilizing both bond markets and stablecoin values.
4. Intensifying Currency Competition
The rise of dollar stablecoins spurs rival digital currency initiatives:
- Digital Yuan (e-CNY): China aims to anchor it to energy trade with Russia and Iran.
- Digital Euro: The ECB reports growing corporate use of USDC in energy deals—from 3% in 2021 to 17% in 2024—spurring urgency in EU digital currency development.
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Risks and Regulatory Challenges
Despite their utility, stablecoins pose significant risks:
- Reserve Transparency: Tether was fined $41 million in 2021 for hiding reserve shortfalls.
- Systemic Spillovers: The SVB crisis showed how off-chain bank failures impact on-chain stability.
- Illicit Flows: UN reports indicate North Korean hackers laundered $100 million via USDT.
- Regulatory Gaps: Only 35% of stablecoins comply with FATF’s “Travel Rule” for anti-money laundering.
Jurisdictional conflicts complicate oversight—Tether is registered in the Cayman Islands but serves users worldwide. Meanwhile, U.S. regulators exert indirect control over major issuers like Circle and Paxos, gaining access to global transaction data.
Implications for China: Risk and Response
Financial and Monetary Risks
For China, dollar stablecoins threaten:
- Capital Controls: $1.2 billion flowed out via USDT in 2023 through fake trade and mining schemes.
- Payment System Competition: In Southeast Asian trade, dollar stablecoins account for 42% of settlements vs. only 6% for e-CNY.
- Data Sovereignty: Circle disclosed over 2,000 Chinese-linked wallet addresses to U.S. authorities in its 2023 report.
- Market Stability: The USDC depeg triggered an 18% drop in Hong Kong’s digital asset stocks (Hang Seng Tech Index).
Strategic Countermeasures
China’s response combines strict regulation with proactive innovation:
Regulatory Measures
- Ban financial institutions from engaging with stablecoins.
- Block access to 120 foreign exchanges; domestic USDT trading volume down 82% (2023–2024).
- Deploy “Chain Sky Eye” system to flag cross-border flows over $50,000; recovered $430 million in illicit funds (2023).
- Enforce strict rules in Hong Kong: full reserve backing, no mainland marketing.
Technological Innovation
- Expand e-CNY use cases: oil trades with Saudi Arabia ($120M/month), gold futures in Shanghai (¥12B daily), HK stock settlement.
- Develop anti-quantum cryptography and interoperability standards with digital euro.
- Embed “regulatory probes” in e-CNY for real-time tracking—used to intercept $24M in smuggling funds.
Global Cooperation
- Push for multilateral rules via IMF and FSB.
- Use Belt and Road energy deals to promote e-CNY adoption (target: 30% of oil imports by 2025).
- Build alliances with ASEAN for emergency crypto reserves and collaborate with France on open-source payment protocols.
Frequently Asked Questions (FAQ)
Q: Are stablecoins really safe if they’re backed by dollars?
A: While fiat-backed stablecoins like USDC are generally secure due to audited reserves, risks remain—such as bank failures (e.g., SVB) or regulatory intervention that could freeze assets.
Q: Can stablecoins replace traditional currencies?
A: Not entirely—but in high-inflation countries, they already function as parallel currencies for savings and remittances.
Q: Is it legal to use stablecoins in China?
A: No. Mainland China bans cryptocurrency transactions and stablecoin usage. However, Hong Kong allows regulated stablecoin pilots under strict conditions.
Q: How do stablecoins affect the average person?
A: They enable faster, cheaper international money transfers and offer protection against inflation—but also pose risks if used through unregulated platforms.
Q: Will central banks ban private stablecoins?
A: Many are moving toward regulation rather than outright bans. The U.S. GENIUS Act sets compliance standards, while China restricts access entirely within its borders.
Q: Could digital yuan compete with dollar stablecoins globally?
A: Yes—by linking e-CNY to real-world trade (oil, commodities) and building multilateral bridges like mBridge, China aims to create a viable alternative.
Conclusion: The Future of Money Is Being Rewritten
Stablecoins are more than financial tools—they are instruments of geopolitical influence. While they enhance payment efficiency and financial inclusion, they also extend U.S. monetary reach and challenge national sovereignty.
China’s strategy is clear: defend domestically, innovate strategically, and compete globally. Through digital yuan expansion, regulatory rigor, and international collaboration, it seeks not only to resist digital dollarization but to shape the next era of monetary order.
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