US & China Divergence & De-dollarization

Recently, extraordinary volatility in currency markets highlighted deepening macroeconomic tensions and significant shifts in global financial dynamics. The USD/JPY climbed sharply toward the 145 level, propelled by the Bank of Japan’s continued dovish stance—holding rates steady without signaling immediate tightening—coupled with the unwinding of long yen positions. Interest rate differentials remain wide, favoring the dollar, as the U.S. Federal Reserve maintains relatively higher rates compared to Japan’s accommodative monetary policy. Meanwhile, the New Taiwan Dollar (TWD) surged over 8% against the USD in a two-day move, an exceptionally rare “19-sigma” event. This abrupt shift, driven by rapid repositioning among Taiwanese institutions reducing their dollar exposures, highlights growing concerns over geopolitical risks and vividly illustrates the practical consequences of intensifying U.S.-China tensions for global currency markets.

TSD/USD Price Chart

Earlier this month, geopolitical tensions between the United States and China intensified dramatically as President Trump raised tariffs on Chinese imports to an unprecedented 145%. China quickly retaliated with 125% tariffs on U.S. goods, deepening the economic divide further. This escalation echoes the classic “Thucydides Trap”, a historical pattern that predicts inevitability of conflict when a rising power challenging an established hegemon. Far beyond mere trade barriers, this episode signals a systematic decoupling of the world’s two largest economies, with significant second-order effects rippling across global liquidity and dollar dominance.

The ubiquity of the U.S. dollar in global trade and finance has long rested upon an implicit yet profound trust in U.S. institutions—trust built on stable governance, predictable foreign policy, and minimal barriers to capital flow. As Bipan Rai, Managing Director at BMO Global Asset Management, aptly notes, “There are clear signs of erosion… pointing toward a structural shift in global asset allocation trends away from the dollar.” Indeed, the foundations of dollar hegemony are subtly fracturing under the pressures of geopolitical volatility and increasingly unpredictable U.S. foreign and economic policies. Notably, despite President Trump’s stern warnings of economic penalties against nations attempting to abandon dollar-based trade, his own presidency has witnessed dramatic currency volatility—the dollar experiencing its steepest decline in his first 100 days since the Nixon era. Such symbolic moments underscore a broader, accelerating trend: nations worldwide are actively seeking alternatives to U.S.-dominated financial systems, marking a gradual shift toward global de-dollarization.

For decades, China’s trade surplus dollars cycled back into U.S. Treasuries and financial markets, underpinning U.S. dollar hegemony since the collapse of Bretton Woods. However, as strategic trust between the U.S. and China has deteriorated sharply in recent years, this longstanding capital loop faces unprecedented disruption. China, traditionally the largest foreign holder of U.S. assets, has markedly reduced its exposure, with holdings of U.S. Treasuries declining to approximately $760.8 billion by early 2025, representing a near 40% drop from their peak in 2013. This shift reflects a broader Chinese strategic response to growing risks associated with potential U.S. economic sanctions, which have previously resulted in substantial asset freezes—most notably illustrated by the ~ $350 billion in Russian central bank reserves freezed in 2022.

Consequently, Chinese policymakers and influential economists have increasingly advocated diversifying China’s reserve assets away from the U.S. dollar, concerned that dollar-based assets are becoming geopolitical liabilities. This strategic reallocation has included a notable increase in gold reserves—approximately 144 tonnes added in 2023 alone—as well as efforts to enhance global use of the yuan and exploration of digital currency alternatives. Such systematic de-dollarization tightens global dollar liquidity, increases funding costs internationally, and poses significant challenges for markets accustomed to China’s recycling of its surplus dollars into Western financial systems.

Source: MacroMicro

Furthermore, China has actively advocated for a multipolar financial order, encouraging developing nations to increasingly conduct trade using local currencies or yuan rather than the U.S. dollar. Central to this strategy is the Cross-Border Interbank Payment System (CIPS), explicitly designed as a comprehensive global alternative to the existing SWIFT and CHIPS networks, encompassing both messaging (SWIFT) and settlement (CHIPS) functionalities. Since its inception in 2015, CIPS has aimed to streamline international transactions denominated directly in yuan, thereby reducing global dependence on U.S.-dominated financial infrastructures. Its broadening acceptance underscores a systematic pivot toward financial multipolarity: by the end of 2024, CIPS had secured participation from 170 direct and 1,497 indirect institutional members across 119 countries and regions. This steady growth reportedly culminated on April 16, 2025, when unverified reports announced that CIPS’s single-day transaction volume exceeded that of SWIFT for the first time, processing an unprecedented ¥12.8 trillion RMB (approximately $1.76 trillion USD). Although not officially confirmed, this milestone nonetheless underscores the transformative potential of China’s financial infrastructure in reshaping global monetary dynamics away from dollar centrality toward a decentralized, multipolar system centered on the yuan.

“Trade invoicing in yuan went from zero per cent to 30 per cent in the last 10 years, and half of Chinese capital flows are now in yuan, much higher than before”

• Keyu Jin (economist at London School of Economics), at a panel hosted by Milken Institute

Source: https://www.cips.com.cn/

Liquidity Must Flow: The CeDeFi Convergence

Yet, as geopolitical boundaries harden and traditional financial corridors narrow, a parallel phenomenon emerges: global liquidity is quietly converging within borderless, decentralized financial networks. The convergence of liquidity across CeFi, DeFi, and TradFi represents an realignment of how the capital flows, positioning blockchain-based networks as critical financial infrastructure in a reshaped global economy.

If not the Fed then the PBOC will give us the yachtzee ingredients. CNY deval = narrative that Chinese capital flight will flow into $BTC. It worked in 2013 , 2015, and can work in 2025. Ignore China at your own peril.

Specifically, CeDeFi convergence is getting pulled by a confluence of many gravitational forces:

• Stablecoin as payment to bring B2B and B2C liquidity on-chain
• CeFi institutions cross-offering crypto & TradFi products
• DeFi protocols bridging off-chain and on-chain yields, creating new avenues for interest rate arbitrage.

Stablecoin as Payment Infrastructure

Payment has been the holygrail of crypto. Tether, the defacto shadow bank of off-shore US dollars, has become the most profitable financial institution per employee. The recent geopolitical volatility will only amplify the demand for stablecoins, as global capital increasingly seeks a censorship-resistant and stateless platform to gain access to dollar exposure. Whether one is an Argentine saver hedging inflation with USDC, or a Chinese merchant using Tether to settle trades off the banking grid, the drive is the same: to access reliable value without the friction of the legacy system. Such demand for “transactional autonomy” is extremely attractive in a time of geopolitical tension and financial uncertainty. In 2024, stablecoin has surpassed Visa in transaction volumes. Ultimately, Digital dollars (stablecoins) on crypto rails are replicating the offshore dollar networks of the 20th century – providing dollar liquidity outside U.S. banking channels, especially in markets wary of U.S. hegemony.

CeFi Institutions Cross-Offering TradFi & Crypto Products

Other than allowing global liquidity to settle via US dollar, we are also seeing CeFi platform vertically expand to crypto, and vice versa:

• Kraken acquired Ninja Trading to expand their their product offerings to tradFi assets, ultimately allow for cross-margin between TradFi and crypto trading
• In China, major brokerage firms like Tiger Brokers and Futu (often referred to as China’s Robinhood) have begun accepting USDT, ETH, and BTC deposits.
• Robinhood has strategically positioned crypto as a core growth priority, planning products like tokenized equities and stablecoins

The horizonal expansion of product offerings across crypto and TradFi will only become more significant as we gain more regulartory clarity with the upcoming market structure bill.

DeFi Protocol Bridges Crypto & TradFi Yield

Simultaneously, we are also seeing DeFi protocols leverage competitive crypto-native yield to onboard TradFi/off-chain money, as well as allows TradFi institutions to tap into global on-chain liquidity to run their off-chain strategies.

For example, our portfolio companies BounceBit @bounce_bitand and Ethena @ethena_labs offers basis trading yield to TradFi institutions. Due to the programmability of on-chain dollar, they are able to package such basis trading product into an on-chain synthetic dollar, directly targeting the $13T fixed-income market. This product could be particularly attrafctive to TradFi institutions because basis trading yield is negatively correlated to treasury yield. As such, they essentially form a new avenue for interst rate abitrage that forces the convergence of capital flows and interest rate market across CeFi, DeFi, and TradFi.

Additionally, Cap Lab @capmoney_ allows TradFi institutions to borrow from on-chain liquidity pools to execute off-chain trading strategies, thereby offering retail investors unprecedented access to sophisticated high-frequency trading (HFT) yields. It effectivelly expand the scope of EigenLayer’s economic security offerings from on-chain economic activities to off-chain yield generation strategies.

Collectively, these developments drive liquidity convergence, compressing the spreads between on-chain yields, off-chain yields, and traditional risk-free rates. Ultimately, these innovative solutions act as powerful arbitrage vehicles, aligning capital flows and interest rate dynamics across DeFi, CeFi, and TradFi landscapes.

CeDeFi Liquidity convergence ——> CeDeFi product offerings

The convergence of CeFi, DeFi, and TradFi liquidity onto blockchain networks signals a fundamental shift in the profile of on-chain asset allocators—from primarily crypto-native traders to increasingly sophisticated institutions seeking diversified exposure beyond crypto-native assets & yield. The downstream effect of this trend is the broadening suites of on-chain financial product offerings to more RWA product offerings. As more RWA product offerings comes on-chain, it will again attracts more institutions from all over the world to come on-chain, creating a reinforcing cycle that ultimately brings all financial participants and financial assets onto one unified, global ledger.

Historically, crypto’s trajectory has progressively incorporated higher-quality real-world assets, evolving from stablecoins and tokenized Treasury bills (such as Franklin Templeton’s Benji and BlackRock’s BUIDL) toward increasingly complex instruments like Apollo’s recent tokenized private credit funds, with the potential to further extend into tokenized equities. The declining appetite for speculative crypto-native assets among marginal buyers underscores a significant market gap and presents an opportunity for institutional-grade, tokenized RWAs. Amid heightened global geopolitical uncertainty—such as the decoupling tensions between major economies like the US and China—blockchain technology is emerging as a credibly neutral financial infrastructure. Ultimately, from trading crypto-native altcoins to payment, tokenized treasuries and equities, all financial activity will converge onto this verifiable and stateless global financial ledger, fundamentally reshaping the global economic landscape.

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