Global Stablecoin Battle Intensifies as China Steps In
In the evolving landscape of finance, a variety of terms are gaining traction, such as cryptocurrencies and stablecoins. Stablecoins represent digital tokens that are supported by an issuing company, which maintains reserves to ensure that you can reclaim an outstanding token if desired. They present an innovative method for conducting transactions in US dollars or other reserve currencies, eliminating the need for banking access. At the same time, this system ensures that the US government retains essential controls and blacklisting abilities for what it considers serious offenses. Stablecoins are increasingly capturing a larger portion of cross-border payments. A recent survey revealed that a significant number of respondents anticipate stablecoins will account for 5-10% of global cross-border payments by 2030, translating to an estimated value of $2-$4 trillion. In a significant move, companies like Tether and Circle, which are behind US-backed stablecoins, have taken the lead by enabling Chinese exporters to utilize US dollar equivalents, effectively navigating around the stringent Chinese capital controls.
Chinese exporters leveraged the digital tokens issued by these companies to invoice directly in Tether to their counterparts. This strategy enabled them to bypass the tightly controlled system of Chinese renminbi, both domestically and internationally, and for some, to evade sanctions. The same concept holds true for Chinese workers pursuing job opportunities abroad. The GENIUS Act represented the American government’s effort to establish regulatory clarity for stablecoins, effectively serving as a stamp of approval for the entire industry. It seems that private issuers involved with US-dollar stablecoins, which account for more than 99% of the stablecoin market, are joining forces with the US government to establish a geopolitical edge. From the viewpoint of the Chinese government, the situation is even more concerning as these stablecoins subsequently entered US banking reserves or were utilized to acquire US treasuries, which in turn supported the issuance of these stablecoins. The model that Tether has is straightforward, yet its implications are groundbreaking. Tether primarily invests in US Treasuries, allowing it to maintain a 1:1 reserve ratio with the digital tokens it issues. The reserves can subsequently generate interest.
Yet this has also positioned issuers like Tether as significant purchasers of US treasuries, coinciding with the Chinese state retreating from the US dollar and US debt – seemingly aligning with a broader trend among central banks toward gold. Tether has surpassed Germany in its holdings of US Treasuries, highlighting its significant scale in the financial landscape. The Chinese state has taken action against its own citizens for engaging in transactions involving US-backed stablecoins. This move can be seen as a significant challenge to the stringent currency control measures that limit the capacity of Chinese individuals to transfer their funds outside of the domestic banking system. The Chinese state has seemingly embraced Yuan-backed stablecoins, marking a new chapter in the global competition surrounding stablecoins. China’s foray into Yuan-backed stablecoins is hardly unexpected – however, it signals the dawn of a new era in the ongoing quest for stablecoin dominance. Hong Kong has initiated the issuance of stablecoin licenses, enabling private companies to express their interest in developing Yuan-backed stablecoins. Notably, major Chinese tech firms Alibaba and JD.com have shown interest in this venture. The move aligns with Hong Kong’s comprehensive strategy to utilize “Web3” and cryptocurrency to draw in foreign investors who have been reluctant to invest in the region due to prior political apprehensions.
This could indicate any forthcoming developments on the subject from the mainland – although Hong Kong continues to uphold a semblance of the “One Country, Two Systems” facade that facilitated Mainland China’s acquisition of the territory from the British – a distinct political and financial system, at least in name, from the Mainland. The Basic Law, which serves as Hong Kong’s constitutional framework, allows for the trading of cryptocurrencies as currency. Any intervention from the Mainland would necessitate a significant change, impacting some of Hong Kong’s most delicate political matters. Currently, the Mainland authorities are satisfied with permitting Hong Kong subsidiaries of Chinese firms to function freely in Hong Kong. Meanwhile, they are imposing restrictions on domestic Mainland companies and investors from engaging in Hong Kong’s cryptocurrency landscape and are making efforts to censor information that advocates for stablecoins within the Mainland. However, this trend isn’t limited to Hong Kong. It’s also evident on the Mainland, with the State Council, which is China’s highest administrative body, and Mainland policy elites exploring what a pathway to Yuan-backed stablecoins might entail. Reports indicate that the State Council is contemplating a plan that could authorize Yuan-backed stablecoins. Initial indications imply that the Mainland is attempting to isolate itself from experimentation. However, there seems to be some emphasis on researching the subject, albeit possibly not to the same extent as the Chinese government’s peculiar interest in blockchain.
The focus on stablecoins could indicate a robust sentiment opposing central bank digital currencies, which are digital payment forms directly managed and issued by central banks. The claimed benefit of the central bank digital currency lies in its ability to create a direct connection between the central bank and end customers, facilitating the issuance of new money without the need for intermediation through the commercial banking system, unlike in other countries. Central bank digital currencies are experiencing a slow uptake, even in China, which boasts the digital Yuan as the most advanced central bank digital currency globally. There seems to be a sense of skepticism regarding the government, coupled with the recognition that existing payment methods like WeChat Pay and Alipay are adequate – raising the question of why one would need to download an additional app. In light of recent reports indicating that government officials receiving payments in e-CNY are converting it to other currencies, coupled with a global shift away from CBDCs, the situation appears grim for central bank digital currencies. The Bank for International Settlements, often referred to as the central bank for central banks, has distanced itself from the ambitious Project mBridge, which aimed to connect various global CBDCs. As it stands, the outlook for CBDC adoption remains uncertain and hesitant. Zhou Xiaochuan, the former central bank governor, issued a cautionary note regarding stablecoins, highlighting the potential financial instability they may bring. At the forefront of his worries is the capacity to bypass capital controls. He favors the existing retail payments landscape in China, encompassing WeChat Pay, Alipay, and the newly introduced Digital Yuan.
Undoubtedly, this is the stack firmly embedded within the tightly regulated Chinese banking system or the central bank itself. With the pace of Digital Yuan adoption tapering off, it seems that the future trajectory may rest in the hands of Chinese users rather than those of policymakers. With a DC-focused lens on stablecoins, particularly regulations designed to tackle the sector, it’s evident that Beijing is closely monitoring the developments. Legislators in Hong Kong are swiftly pushing forward their own version of experimentation, amid circulating rumors of similar developments occurring in the Mainland. Bitcoin’s ascent has prompted numerous nations to contemplate their position in this evolving landscape. As stablecoin issuers acquire a substantial portion of US debt, attention has shifted towards the regulation and assessment of Bitcoin utilization, alongside efforts to promote stablecoin adoption internationally to bolster the dominance of the US dollar. As Beijing appears to gear up for a response, this could signal the emergence of a new battleground in the geopolitics of stablecoins. However, the hesitance displayed by Beijing on this issue may reflect a miscalculation regarding its previous cryptocurrency bans and an underlying apprehension about the unpredictable influence of Chinese retail investors.
