Potential Impact of Stablecoins on the Financial System

Stablecoins are a type of cryptocurrency that is pegged to a specific asset (usually fiat currency), serving as a bridge between decentralized financial systems (DeFi) and traditional financial systems. They are also an important infrastructure for decentralized financial systems (DeFi). Recently, the United States and Hong Kong have successively passed stablecoin regulatory bills following the European Union, marking the formal establishment of a regulatory framework for stablecoins in some major regions of the world. While decentralized finance is ushering in development opportunities, it may also deepen the integration with traditional financial systems, bringing new challenges and risks to the global financial system.

Summary

Milestone in Cryptocurrency Regulation. Recently, the U.S. passed a stablecoin bill, becoming the first in the U.S. to establish a regulatory framework for stablecoins, filling a regulatory gap in this area. Just two days later, Hong Kong also passed a similar stablecoin bill, helping Hong Kong to participate in the global digital financial center competition and solidifying its status as an international financial center. Stablecoins serve as a "bridge" between traditional financial systems and decentralized financial systems (DeFi). Following the European Union, both the U.S. and Hong Kong have introduced regulatory frameworks for stablecoins, marking an important step for cryptocurrency to integrate into the mainstream financial system.

From "barbaric growth" to gradually moving towards standardized development. The recent stablecoin-related legislation mainly addresses the risk points that have emerged in the industry, including the lack of transparency in reserve assets, liquidity management risks, instability in the value of algorithmic stablecoins, money laundering and illegal financial activities, and insufficient consumer protection, by establishing a series of regulations. The legislation refers to the regulatory framework for traditional financial institutions but is stricter in terms of liquidity management. The legal reserve ratio for banks in the United States, the European Union, and Hong Kong is close to 0%, but issuers of stablecoins are required to maintain a reserve ratio of 100%. Foreign regulation does not position stablecoins as "on-chain deposits" but rather as "on-chain cash," thereby solidifying the foundation of the decentralized financial system.

How to understand the impact of stablecoins on the financial system? As of the end of May 2025, the total market value of mainstream stablecoins is approximately $230 billion, which represents more than a 40-fold increase compared to the scale at the beginning of 2020, showing rapid growth. However, compared to the scale of the mainstream financial system, it is still relatively small, only equivalent to 1% of onshore deposits in the United States. In terms of transaction volume, stablecoins play a significant role as an important payment method and infrastructure in the cryptocurrency system. The annual transaction volume of mainstream stablecoins (USDT and USDC) reaches $28 trillion, surpassing the annual transaction volume of credit card organizations Visa and Mastercard. With the inclusion of stablecoins into the financial regulatory framework, decentralized finance is also expected to usher in development opportunities and deepen its integration with the traditional financial system.

A lower-cost, more efficient means of international payments. According to data from the World Bank, as of Q3 2024, the average remittance fee globally is 6.62%, while the United Nations' 2030 Sustainable Development Goals require that this fee be reduced to no more than 3%, and the time for funds to arrive should take 1-5 working days. The efficiency of traditional financial systems is mainly affected by the need to go through multiple intermediary banks on the SWIFT network. In contrast, the remittance fee rate using stablecoins is generally less than 1%, with the time usually being within a few minutes. In the long term, as regulatory frameworks improve, we expect the market share of stablecoins in international payments to increase, although this process is still accompanied by industry development and regulatory improvements.

Full reserve requirement limits currency creation function: The theoretical requirement of 100% reserve assets restricts the ability of stablecoin issuing organizations to engage in credit expansion. The process of converting deposits into stablecoins is essentially a transfer of bank deposits rather than creation, therefore the issuance of stablecoins theoretically does not affect the supply of USD. However, when funds continue to flow out, deposits may lead to bank balance sheet reduction and a decrease in money supply; the process of converting other currencies into USD stablecoins essentially produces a currency exchange effect, but this is reflected as the flow of USD across borders or accounts, without affecting the total USD money supply. Additionally, lending platforms that use cryptocurrencies as collateral effectively perform a similar credit creation function as banks, which can increase the scale of "quasi-money" (i.e., stablecoins) in the decentralized financial system, but do not affect the supply of traditional currency.

The disintermediation impact on bank deposits. The impact of stablecoins on the banking system is mainly reflected in the financial disintermediation effect (i.e., disintermediation), where the conversion of deposits into stablecoins may lead to deposit outflows. This effect is similar to the impact of money market funds and high-yield bond markets on the banking system. For example, since 2022, approximately $2.3 trillion in deposits have flowed into money market funds in the high-interest-rate environment in the United States, becoming one of the trigger factors for the Silicon Valley Bank risk event. According to statistics from the Federal Deposit Insurance Corporation, by the end of 2024, approximately $6 trillion of the $18 trillion in deposits held by banks in the United States are transactional deposits, classified by the U.S. Treasury as deposits theoretically facing outflow risks. However, considering that the development of stablecoins has been incorporated into the government regulatory framework, the impact on the financial system is relatively controllable. At the same time, traditional banks have also explored some measures to adapt to the development trend of stablecoins and address the challenge of deposit diversion.

Undertaking government debt and affecting the transmission of monetary policy. As of the first quarter of 2025, the issuers of USDT and USDC held a total of about $120 billion in U.S. Treasury reserves. If combined as an "economy", they rank 19th in the world for overseas holdings of U.S. Treasury securities, situated between South Korea and Germany in terms of holdings. With the market value of stablecoins rising, we expect the demand for U.S. Treasury bonds as reserve assets to increase. However, stablecoins can primarily undertake short-term U.S. Treasury bonds with maturities of less than three months, and we expect their ability to absorb long-term U.S. Treasury bonds to be limited. Short-term U.S. Treasury bond yields are influenced by central bank monetary policy adjustments, depending on real economy factors such as inflation and employment. For monetary policy, when stablecoin issuers buy U.S. Treasury bonds, it lowers short-term interest rates, necessitating the central bank to withdraw money to hedge; in the long term, the attractiveness of stablecoins for deposits may lead to a trend of financial disintermediation, resulting in a shift of financing from the traditional financial system to a decentralized financial system, which may also weaken the effectiveness of central bank monetary policy adjustments.

The transmission of cryptocurrency asset price fluctuations to financial markets. From the perspective of money creation, the lending behavior within the decentralized financial system realizes the "quasi-money" creation function, especially by purchasing tokenized equity assets through stablecoins, which directly leads to capital inflows/outflows in the stock market; from the perspective of market sentiment, cryptocurrency price fluctuations are significant and affect stock market expectations. Historically, there has been a certain correlation between the Nasdaq index and Bitcoin prices; in the stock market, targets related to cryptocurrency assets and stablecoins influence stock prices through changes in fundamentals.

The potential restructuring force of the international monetary order. For the US dollar, the impact of stablecoins is somewhat "contradictory": on one hand, since 99% of fiat stablecoin market value is pegged to the dollar, the development of stablecoins seems to reinforce the dollar's dominant position in the global financial system; on the other hand, the international backdrop of stablecoin and cryptocurrency development is actually based on the rising risks of geopolitical restrictions in the financial sector and the weakening of fiscal discipline under the trend of de-globalization, leading to a demand for de-dollarization in certain economies. Therefore, the close peg of stablecoins to the dollar not only reflects the dollar's global financial dominance but also serves as a "bridge" towards a more diversified new order in the global financial system. In addition, the recent moves by the EU and Hong Kong to open up space for the issuance of non-dollar stablecoins have initiated competition against the dollar's dominant position in the stablecoin space. In the long term, whether the dollar's status continues to be reinforced under the guidance of a new regulatory framework for stablecoins or faces challenges from other currencies and cryptocurrencies themselves remains to be observed as the industry develops. For emerging economies, due to the competitive nature of stablecoins against local currencies, if local residents and businesses use stablecoins for settlement, it would effectively convert the local currency to dollars, leading to currency depreciation and inflation; thus, for financial security reasons, several economies have implemented restrictions on the use of stablecoins.

Implications for Currency Internationalization. For the Hong Kong Dollar, regulating the issuance of stablecoins, especially the Hong Kong Dollar stablecoin, helps enhance the influence of the Hong Kong Dollar in cross-border payments, crypto assets, and other fields, strengthening the international competitiveness of Hong Kong's financial industry and the Hong Kong Dollar, solidifying Hong Kong's status as an international financial center. At the same time, Hong Kong can leverage its financial market advantages and the institutional innovations brought by the stablecoin bill to provide a "testing ground" for the internationalization of other currencies. The bill allows for the issuance of non-U.S. Dollar stablecoins, which can expand the use of non-U.S. Dollar currencies in international payments, settlements, and investment financing scenarios, accelerating the internationalization process. In summary, the Hong Kong stablecoin bill has a profound impact on currency internationalization, but this process still requires ongoing attention to financial stability risks and timely optimization and adjustment of related policies.

Risk

The risks in the cryptocurrency industry are developing, the impact of stablecoins on the traditional financial system is beyond expectations, and the advancement of regulatory policies is not meeting expectations.

Main text

Stablecoin Bill: A Milestone in Cryptocurrency Regulation

The EU, the US, and Hong Kong have established stablecoin regulatory frameworks successively

Stablecoins are a type of cryptocurrency that is pegged to a specific asset (usually fiat currency), serving as a bridge between decentralized financial systems (DeFi) and traditional financial systems, and are an important infrastructure for decentralized finance (DeFi). Recently, the United States passed a stablecoin bill, becoming the first U.S. legislation to establish a regulatory framework for stablecoins, filling a regulatory gap in this area. Just two days later, Hong Kong also passed a similar stablecoin bill, helping Hong Kong to participate in the global digital financial center competition and solidifying its position as an international financial center. Stablecoins act as a "bridge" between traditional financial systems and decentralized financial systems (DeFi). Following the European Union, both the United States and Hong Kong have introduced regulatory frameworks for stablecoins, marking an important step for cryptocurrencies to integrate into the mainstream financial system.

From "barbaric growth" to gradually moving towards standardized development

In the past, the stablecoin sector has faced several significant risks and regulatory events, including the collapse of TerraUSD (UST) in 2022, regulatory restrictions imposed by the European Union due to unclear underlying assets of Tether (USDT) in 2024, and the New York financial regulators' requirement for a certain platform to stop minting dollars in 2023. The stablecoin-related legislation in the United States and Hong Kong primarily targets the risk points that have emerged in the industry, including issues such as lack of transparency in reserve assets, liquidity management risks, instability in the value of algorithmic stablecoins, money laundering and illegal financial activities, and inadequate consumer protection, and establishes a series of regulations, the main contents of which include:

1. In terms of liquidity, the stablecoin reserve assets must be 100% pegged to fiat currency or highly liquid assets, including cash, demand deposits, short-term U.S. Treasury bonds, etc. The reserve assets need to be segregated from operating funds to prevent misappropriation;

2. In terms of admission qualifications, it is required that the issuing institution obtains regulatory license authorization and establishes a minimum capital admission threshold;

3. Require stablecoins to be incorporated into the existing anti-money laundering regulatory framework and establish customer identification requirements;

4. In terms of consumer protection, it is required to ensure that users can redeem at face value and that customer funds have priority repayment rights in case of bankruptcy;

5. Clearly prohibit stablecoin interest payments to reduce the impact on the traditional financial system.

In fact, the above stablecoin regulations reference the regulatory framework for traditional financial institutions, setting similar requirements in areas such as licensing, capital, liquidity management, anti-money laundering, and consumer protection, but with stricter liquidity management. The statutory reserve requirement ratio for banks in the United States, European Union, and Hong Kong is close to 0%, but the reserve requirement ratio for stablecoin issuers is set at 100%. Foreign regulation does not position stablecoins as "on-chain deposits", but rather as "on-chain cash" (despite the issuer being a commercial entity, which distinguishes it from central bank digital currencies), thereby solidifying the foundation of the decentralized financial system.

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