What Does China's Most Powerful Former Central Bank Governor Think of Stablecoins?

Author | Zhou Xiaochuan

Original Link:

https://mp.weixin.qq.com/s/FsfMgTBpeqLOrYAq3XO6vw

1. Central Bank Dimension: Preventing Currency Over-Issuance and Leverage Amplification

Stablecoin issuers seek to minimize their own costs while achieving the maximum issuance and application scale. They may wonder: if central banks can print money, why can’t I? Today, through stablecoins, they also possess a money-printing function. However, due to insufficient understanding and lack of responsibility regarding monetary policy, macroeconomic management, and public infrastructure functions, they may lack self-discipline, leading to uncontrolled issuance, excessive leverage, and instability. Whether a stablecoin is truly “stable” cannot be self-proclaimed; there must be an assessment mechanism.

At present, central banks have at least two concerns. The first is “currency over-issuance,” i.e., issuers minting stablecoins without holding a genuine 100% reserve. The second is leverage amplification, meaning that once issued, stablecoins generate derivative multiplier effects in circulation. The U.S. GENIUS Act and Hong Kong’s Stablecoin Regulation have both addressed this issue, but enforcement remains clearly insufficient.

First, it must be clear who the reserve custodian is. In practice, there have been many cases of negligent custodians. In 2019, Facebook’s initial plan was to self-custody Libra’s reserve assets, retaining both autonomy and the returns on reserves. But reserve custody must be reliable — either directly held by a central bank or by a custodian recognized and supervised by the central bank. Otherwise, reliability is questionable.

Second, how should the multiplier effect of stablecoins in circulation be measured and managed? Even if issuers hold 100% reserves, subsequent use (such as lending, collateralization, trading, and revaluation) can still generate multiplier effects, meaning that potential redemption demand could be several times larger than the reserves. While surface-level regulations appear to prevent amplification, a deeper understanding of money issuance and circulation shows that current rules are far from adequate to counter derivative multiplication.

Hong Kong’s note-issuing system provides a useful reference: its three note-issuing banks must deposit 1 USD with the Hong Kong Monetary Authority for every 7.8 HKD issued, and in return receive a certificate of indebtedness. Based on the monetary base (M0), the economy and financial system then generate M1 and M2 through derivative and multiplier effects. In a bank run, redemption pressures target not just M0 but also M1 and M2. Even if M0 has full reserves, those reserves alone cannot handle a run or maintain monetary stability.

Stablecoin amplification typically arises through three channels: (1) lending, (2) collateralized financing, and (3) asset market trading (purchasing or revaluing reserve assets). Regulators therefore need to track and calculate the actual circulation of issued stablecoins, otherwise the scale of potential redemption risks cannot be known. Amplification also creates opportunities for fraud and market manipulation.

2. Financial Service Model Dimension: Real Demand for Decentralization and Tokenization

If future ecosystems feature large-scale decentralization of financial activities and large-scale tokenization of assets and instruments, stablecoins will have significant value. First, stablecoins can support the development of decentralized finance (DeFi). Second, tokenization is a necessary foundation for DeFi. But how much, and why, will finance actually move toward decentralization and tokenization?

On the supply side, blockchain and distributed ledger technology (DLT) indeed provide decentralized operations. But from the demand perspective, how much need is there for such a system? Will most financial services shift into it?

A calm analysis shows that not all financial services are suited to decentralization, and very few can achieve major efficiency gains through it. Likewise, the real demand for tokenization as a technical foundation also requires sober assessment.

Consider payments, especially cross-border: in China and several Asian countries, retail payment systems based on mobile phones, QR codes, and near-field communication (NFC) have already made significant progress, still within account-based systems. China’s digital currency is also account-based, extending and upgrading the existing system. Other Asian countries’ fast payment systems with cross-border connections have also not chosen decentralization or tokenization.

So far, centrally managed account systems have demonstrated good applicability. There is insufficient justification to fully replace them with tokenized, account-free systems.

The Bank for International Settlements (BIS) has proposed a centralized ledger framework, the Unified Ledger, to tokenize bank deposits and many other financial services within a centralized structure, where central bank digital currencies (CBDCs) can play a critical role — a combination of centralization and tokenization. It must be questioned, however, whether all financial assets are suitable for tokenization, or all financial services suitable for decentralization. Each case requires detailed analysis and comparison.

3. Payment System Perspective: Technology Paths and Compliance Challenges

Payment system upgrades involve two main concerns: efficiency and compliance.

Improved payment efficiency is considered one of the potential advantages of stablecoins. In today’s digital payment evolution, there are broadly two paths: (1) continue optimizing account-based systems with IT and internet innovations; (2) build entirely new blockchain- and cryptocurrency-based systems.

In China and Southeast Asia, most progress to date has come from the first path: third-party payment platforms, CBDC developments, NFC-based hardware wallets, and fast payment system interconnections. These have already greatly improved efficiency and convenience.

But technical design alone is not decisive. Payment systems must also meet strict safety and compliance requirements, including Know Your Customer (KYC), identity verification, account management, Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), anti-gambling, and anti-drug trafficking measures. Some argue that since stablecoins are blockchain-based, they do not require account-opening. This is inaccurate: even “soft wallets” must undergo identity verification and account procedures to satisfy compliance. At present, stablecoin payment systems show significant deficiencies in KYC and compliance.

4. Market Trading Dimension: Market Manipulation and Investor Protection

From the perspective of financial and asset market trading, the main concern is market manipulation, especially price manipulation, which requires transparency and effective regulation. Such manipulation already exists, with several documented cases, some involving outright fraud. Yet, under current improved frameworks — the U.S. GENIUS Act, Hong Kong’s regulations, and Singapore’s guidelines — confidence remains lacking.

A new phenomenon is hybrid-currency use, where multiple currencies, not all stablecoins, circulate within one system without consistent or recognized standards of “stability.” In today’s asset markets, especially on virtual asset exchanges, payments may be made in stablecoins, unstable cryptocurrencies, or even highly volatile tokens. This structure increases opportunities for manipulation and has become a regulatory focus.

Notably, some promoters claim that by using stablecoins and Real World Assets (RWA) technologies, assets can be divided into very small fractions, broadening participation. They even tout that this model has attracted many students under 18.

Some argue this helps cultivate youth involvement in capital markets and future prosperity. But from an investor protection perspective, whether this is truly beneficial is doubtful. Historically, investor suitability and qualification have been emphasized. There is little basis to conclude minors are appropriate participants in asset trading. Without effective safeguards against manipulation, bringing in unqualified investors will only amplify risks.

5. Micro-Level Behavior Dimension: Motivations of Participants

Stablecoin issuers are typically for-profit businesses. Many participants in stablecoin-related payment and asset trading are also commercial entities, driven by business motives. Yet stablecoins and payment systems also contain infrastructure and public-good functions that cannot be guided solely by profit maximization. A clear distinction is needed between areas suitable for market players and those of an infrastructural nature.

Micro-level analysis is needed: Why do users choose to pay with stablecoins? Why do merchants accept them? What motivates issuers? What outcomes do private exchanges seek? Hong Kong has issued 11 virtual asset trading platform licenses — what types of clients and products do these licensed players focus on? How do they generate profit?

Although many believe stablecoins will reshape payment systems, objectively, existing systems — especially retail payments — already have little room for further cost reduction. In China, retail payment systems (third-party platforms, CBDC, wallets, clearing infrastructure, etc.) have not taken the decentralized or tokenized route, but after years of development, they are already efficient and low-cost. New entrants have very limited opportunities to cut costs and profit in this space.

In the U.S., however, some space remains, since retail payments rely heavily on credit cards where merchants typically pay 2% transaction fees, creating motivation to adopt cheaper alternatives. This shows payer and payee incentives vary across countries.

Cross-border payments and remittances are often cited as promising stablecoin applications. But a deeper analysis requires breaking down why such payments are costly: which specific steps drive high fees?

Claims that traditional cross-border payment systems are “technically very expensive” may be exaggerated. Many costs are not technological but due to foreign exchange controls tied to balance of payments, exchange rates, and monetary sovereignty. Other costs arise from compliance (KYC, AML), which stablecoins cannot avoid. A further component comes from the “rent” of foreign exchange as a licensed business. In sum, stablecoins are not as attractive for cross-border payments as imagined — except in countries with failed currencies seeking dollarization.

From issuers’ perspective, if payments (domestic or cross-border) are not attractive, they will likely focus on asset trading, especially virtual assets. These markets contain speculative assets prone to price inflation, boosting stablecoin demand. Some virtual assets can even be used as (semi-)qualified reserves for issuance.

At the micro level, caution is needed against stablecoins being overused for speculation. This misdirection could cause fraud and financial instability.

Additionally, some firms use stablecoin hype to inflate valuations, raising funds from capital markets or cashing out after appreciation, while paying little attention to whether stablecoin operations themselves are profitable or sustainable. This behavior undermines healthy system development and may create systemic risks.

6. Circulation Path Dimension: From Issuance to Redemption

The stablecoin circulation path covers issuance, market use, and redemption.

Consider the People’s Bank of China: printed banknotes are first stored in issuance vaults, only entering circulation if commercial banks need them. Banks withdraw cash only when facing net client demand or credit mismatches. Withdrawals incur costs, so banks return excess cash to the vault. Circulation does not happen automatically.

Likewise, a licensed stablecoin issuer depositing reserves has not automatically “issued” stablecoins. Without sufficient demand, coins may not circulate effectively. Theoretically, circulation should follow multiple network paths, with a few large channels. If payment use is blocked, circulation will rely excessively on speculative asset trading, raising concerns about sustainability.

Whether stablecoins serve only as temporary settlement media or as value stores also affects outstanding supply. If held only briefly for transactions, circulation remains small, limiting issuance. This involves pathways, holding motives, and supporting systems — none of which are automatically granted by an issuance license.

Conclusion

In facing stablecoins, scholars, researchers, and practitioners must adopt multidimensional analysis of their functions and implementation paths, avoiding imprecise concepts, flawed data, or one-sided thinking. Only by weighing all dimensions together can the market’s direction be better guided.

Note: This article is based on excerpts from a speech delivered by Zhou Xiaochuan, former Governor of the People’s Bank of China, at the CF40 biweekly closed-door seminar “Opportunities and Prospects of RMB Internationalization” on July 13, 2025. The main content is drawn from his remarks at the International Capital Market Association (ICMA) Annual Conference in Frankfurt on June 5, 2025, with slight adjustments.

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