Why have stablecoins become the most eye-catching? Is there a need for a renminbi stablecoin?

In this episode of the podcast, we discuss “stablecoin.” This concept has been gaining traction over the past two years, especially this year, as new laws and developments have emerged in Hong Kong and the United States. Stablecoins have clearly become the “star” in the financial sector. Its growth rate is astonishing, with the market size exceeding $230 billion in 2023 and active accounts surpassing 250 million. Citibank has even optimistically predicted that by 2030, the stablecoin market size could reach $3.7 trillion, rivaling China’s forex reserves.

Recently, the regulation of stablecoins has been accelerating globally. For example, the GENIUS Act in the United States has passed the Senate, and the Hong Kong Monetary Authority launched a stablecoin sandbox project as early as 2024. Furthermore, the Legislative Council passed the draft regulation on May 21, officially establishing a licensing system for the issuance of stablecoins—meaning that whether issuing fiat stablecoins within Hong Kong or issuing stablecoins pegged to the Hong Kong dollar overseas, a license must be held.

However, for the average person, stablecoins are still a somewhat “cloudy” concept, easily confused with digital RMB, Bitcoin, and even Trump Coin, Dogecoin, etc. Recently, I have even heard many people asking: "Will stablecoins become the next Bitcoin since they are so hot?" - This misunderstanding is exactly what we need to clarify today.

More importantly, at a time when significant progress has been made in USD stablecoins and HKD stablecoins, will a RMB stablecoin appear in the world? Is it necessary? Is it feasible?

·Transcript·

01 Core Concept Analysis: Differences Between Stablecoin, Digital RMB, and Bitcoin

To understand stablecoins, it is essential to distinguish them from several other popular concepts.

· Central Bank Digital Currency (like Digital RMB): It’s not something new; it’s essentially a new form of RMB, just like paper money and coins. It is RMB itself, just presented in a different form.·** Bitcoin:** Its original intention was to become a new “money,” but due to slow payment speeds and the lack of an issuing entity, it has deviated from the path of currency and resembles more an asset for investment. It can be said that as a currency, it has failed, but as an asset, it is quite successful.·** Stablecoin:** It is a “representative of currency,” issued based on real fiat currency and pegged to it at a 1:1 ratio. A vivid analogy is the chips in a casino or meal tickets in a canteen—you exchange real money for them, use them in specific situations, and when used up, you can exchange them back for real money at a 1:1 ratio.

Overall, these all belong to the family of “crypto assets”. In this family, there is the central bank issued “fiat digitalization” (digital yuan), there are the “tokens” (stablecoin) pegged to fiat currency, there is the “digital gold” (Bitcoin) native to the blockchain world, and there are the “meme coins” (Dogecoin) supported purely by faith and stories. Today, we mainly discuss the compliant stablecoins that are regulated, backed by reserves, and pegged to fiat currency.

02 How do stablecoins ensure “stability”? The mechanisms and risks behind it

Although the name is “stablecoin,” historically it has not always been stable. For example, the largest USD stablecoin USDT once fell below 1 dollar, and the compliant USDC also dropped to 0.8 dollars at one point due to reserve issues during the Silicon Valley Bank crisis, while the algorithmic stablecoin Terra/Luna completely collapsed to zero.

So, how can stablecoins truly maintain stability? In fact, the principle is quite simple, similar to the logic of ancient money houses:

1. Adequate reserves: For every one unit of stablecoin issued, there must be one unit of real currency held as reserves. 2. Asset safety: This reserve must be securely stored and cannot be used arbitrarily. 3. Rigid redemption: Users must be able to exchange for fiat currency at any time and without conditions.

Historically, it was because early “goldsmiths” (similar to issuers) discovered that they could misappropriate reserves to lend, which led to an inability to redeem and triggered a bank run. Therefore, the core of modern regulation is to prevent such risks. Regulations in the United States and Hong Kong clearly require that reserve assets must be sufficient and of high quality (such as cash, short-term government bonds), must publicly disclose asset status monthly, and prohibit the payment of interest to mitigate speculative risks. These measures are actually similar to regulatory requirements for banks regarding capital adequacy ratios and reserve requirements.

03 What real-world problems do stablecoins solve?

The rapid development of stablecoins is due to their ability to meet specific market demands, especially in areas that are difficult for traditional financial systems to cover.

·Demand for payment in emerging fields: With the development of blockchain technology, there is a need for a convenient payment tool in emerging economic activities such as NFT trading and on-chain gaming. Stablecoins precisely fill this gap, just like Alipay solved the payment difficulties in Taobao transactions back in the day.****·Value transfer in gray areas: In scenarios where traditional financial channels are blocked, stablecoins play an important role. For example, in countries facing sanctions or severe fluctuations in local currency, local people and merchants use USD stablecoins to preserve value and conduct trade settlements. Small merchants in Yiwu, China, may also use stablecoins to solve payment collection difficulties when trading with some countries in Asia, Africa, and Latin America.

From the issuer’s perspective, they can profit by charging transaction fees or by using the reserve funds accumulated to make low-risk investments (such as purchasing government bonds), thus having the motivation to explore more application scenarios.

04 Stablecoin and Digital Renminbi: Opponents or Allies?

There are both conflicts and complements between stablecoins and central bank digital currencies (such as the digital renminbi).

Technically, there isn’t much difference between the two. The so-called “decentralization” in stablecoins is also a false proposition, as there is still a centralized issuing authority.

The key difference lies in the development model and incentive mechanism. As a legal tender, the central bank hopes that the digital RMB can cover all payment scenarios, but commercial banks may lack sufficient commercial interest-driven motivation in its promotion. On the other hand, issuers of stablecoins have clear profit motives and will be more motivated to seek and develop the most suitable and efficient application scenarios.

From this perspective, stablecoins are more like the “scouts” or “pathfinders” of digital RMB. The successful application scenarios they explore in front are likely to be referenced and absorbed by digital RMB in the future. It can be said that stablecoins “first wear a vest to explore the path, and once the path is clear, digital RMB will take off the vest and follow.”

05 Do we need the Renminbi stablecoin?

The answer is yes, if there is demand, it should be issued. However, issuing stablecoins cannot only focus on the convenience of payments at that moment, but also consider the currency management system behind it.

If the reserves of a stablecoin are used by the issuer for lending or investment, it will create new money out of thin air, thereby affecting the liquidity and interest rates of the entire society, and even interfering with the central bank’s monetary policy. Therefore, if it is to be issued, strict regulation is necessary.

From another perspective, both the United States and Hong Kong have incorporated overseas issued stablecoins that are pegged to their own fiat currencies into regulation. As the internationalization of the renminbi progresses, if we do not actively establish a set of management rules to regulate the potential emergence of renminbi stablecoins abroad, we will leave risk loopholes. In fact, there are already small-scale renminbi stablecoins existing overseas. Therefore, issuing and establishing corresponding regulatory systems is necessary and urgent.

06 How to issue Renminbi stablecoin?

We can learn from Hong Kong’s “sandbox mechanism” and initially pilot in a small scope before promoting it more widely. The pilot can be conducted both domestically and abroad, but the offshore market (such as Hong Kong) may be more valuable for the pilot because it can better test cross-border application scenarios and observe its impact on international capital flows, providing richer experience for regulation.

With regard to issuers, it can be considered that only banks can be allowed to issue (similar to cashier’s checks), or eligible non-financial institutions can be allowed to participate under the sandbox mechanism. The market will eventually make excellent stablecoins stand out through competition and selection, just like a payment license, although many tickets are issued, but in the end the market is mainly dominated by a few leading institutions.

07 Impact of Stablecoin on the Financial System

Impact on foreign exchange controls: The key lies in the depth of supervision. If KYC (Know Your Customer) is only carried out at the issuance stage, and the subsequent transaction link is not adequately supervised, it may form a loophole in capital flow. Impact on monetary policy: Mainly depends on the loosening of regulatory rules. If the issuer is allowed to invest the reserves, then its size and scope of investment will have a direct impact on the money supply. Regulation must strike a balance between “allowing issuers to make profits” and “maintaining financial stability”.

Ultimately, the key to whether stablecoins can succeed lies in: “Can I convert it back to cash?” If it cannot be safely and conveniently exchanged for fiat currency, then no matter how advanced the technology and model are, it will all be in vain.