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

In this episode of the podcast, we will talk about "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 become the "most eye-catching" 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 even optimistically predicts that by 2030, the stablecoin market size could reach $3.7 trillion, comparable to China's forex reserves.

Recently, global regulation of stablecoins has been accelerating. 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. Additionally, the Legislative Council passed the bill 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 abroad, a license is required.

However, for the average person, stablecoins are still somewhat of a "cloudy" concept, easily confused with digital yuan, Bitcoin, and even Trumpcoin and Dogecoin. Recently, I've even heard many people asking: **"Will stablecoins, which are so popular now, rise to become the next Bitcoin?"—this misunderstanding is exactly what we need to clarify today.

More importantly, at a time when there have been notable advancements in USD stablecoins and HKD stablecoins, will a RMB stablecoin emerge in the world? Is it necessary? Is it feasible?

·Transcript·

01 **Core Concept Analysis:**Stablecoin, Digital RMB, and the Differences with Bitcoin

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

· Central Bank Digital Currency (e.g., Digital Renminbi): It is not a new thing; it is essentially a new form of Renminbi, just like paper money and coins. It is the Renminbi itself, only in a different form. · Bitcoin: Its original intention was to become a new "money," but due to issues such as slow payment speed and lack of an issuing entity, it has deviated from the track of currency and is more like 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 "representation of currency," issued based on real fiat currency and pegged to it at a 1:1 ratio. A vivid analogy is casino chips or cafeteria meal tickets — you exchange real money for them and use them in specific scenarios, and when you run out, you can still exchange them back for real money at a 1:1 ratio.

Overall, these all belong to the big family of "cryptographic assets." Within this family, there are central bank issued "fiat currency digitalization" (digital RMB), "tokens" (stablecoins) that are pegged to fiat currency, the "digital gold" (Bitcoin) native to the blockchain world, and "meme coins" (Dogecoin) that are purely supported by faith and stories. Today, we mainly discuss those compliant stablecoins that are regulated, have reserves, and are pegged to fiat currency.

02 How do stablecoins achieve "stability"? The mechanisms and risks behind it

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

So, how can stablecoins truly maintain stability? The principle is actually quite simple, similar to the logic of ancient money exchanges:

1. Sufficient Reserve: When issuing a stablecoin worth one dollar, there must be one dollar of real currency as a reserve behind it. 2. Asset Security: This reserve must be securely stored and cannot be arbitrarily used. 3. Rigid Redemption: When users want to exchange back to fiat currency, they must be able to redeem it at any time and without conditions.

Historically, it was precisely because early "goldsmiths" (similar to issuers) discovered that they could misappropriate reserve funds for lending that 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 and short-term government bonds), asset status must be publicly disclosed monthly, and the payment of interest is prohibited to prevent speculative risks. These measures are actually similar to regulatory requirements for banks regarding capital adequacy ratios and reserve requirements.

03 What real problems do stablecoins solve?

The rapid development of stablecoins is due to the fact that they indeed meet specific market needs, especially in areas that are difficult for traditional financial systems to cover.

·Payment Demand 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 perfectly fill this gap, just like Alipay solved the payment difficulties for Taobao transactions back in the day.****·Value Transfer in Gray Areas: In scenarios where some traditional financial channels are blocked, stablecoins play an important role. For example, in countries that are under sanctions or experiencing severe fluctuations in their local currency, local people and merchants may use USD stablecoins to preserve value and conduct trade settlements. Small merchants in Yiwu, China, may also use stablecoins to solve payment collection issues 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 for low-risk investments (such as purchasing government bonds), thus having the motivation to explore more application scenarios.

04 Stablecoin and Digital Renminbi: Are They Competitors or Allies?

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

Technically, there is not much difference between the two. The so-called "decentralization" is also a false proposition in stablecoins, as there is also a centralized issuing institution.

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

From this perspective, stablecoins are more like the "scouts" or "pioneers" for digital RMB. The successful application scenarios they explore in the 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 road, and when the road is clear, digital RMB will take off the vest and catch up."

05 Do we need the Renminbi stablecoin?

The answer is affirmative, if there is a demand, it should be issued. However, issuing stablecoins should not only consider the convenience of payment at that moment, but also take into account the underlying currency management system.

If the reserves of a stablecoin are lent or invested by the issuer, it will create new money out of thin air, thus affecting the liquidity of funds, interest rates in the entire society, and even interfering with the central bank's monetary policy. Therefore, if one is to be issued, there must be strict regulation.

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

06 How to issue Renminbi stablecoin?

We can draw on Hong Kong's "sandbox mechanism" to conduct pilot programs in a small scope first, and promote it after success. The pilot programs can be conducted both domestically and internationally, but the offshore market (e.g., Hong Kong) may be more valuable for piloting because it can better test cross-border application scenarios and observe its impact on international capital flows, providing richer experience for regulation.

Regarding the issuing entities, it can be considered to only allow banks to issue (similar to bank notes), or under a sandbox mechanism, allow qualified non-financial institutions to participate. The market will ultimately allow excellent stablecoins to stand out through competition and selection, just like payment licenses; although many have been issued, the market is mainly dominated by a few leading institutions.

07 Impact of Stablecoins on the Financial System

·Impact of Forex Controls: The key lies in the depth of regulation. If KYC (Know Your Customer) is only conducted at the issuance stage, and there is insufficient regulation in the subsequent trading stages, it may create loopholes for capital flow.

****·Impact on Monetary Policy: Mainly depends on the looseness or tightness of regulatory rules. If issuers are allowed to use reserves for investment, then the scale and scope of investment will directly affect the money supply. Regulation must find a balance between "allowing issuers to profit" and "maintaining financial stability."

Ultimately, the key to whether stablecoins can succeed lies in: "Can I convert it back to cash?" If it cannot ultimately be safely and conveniently exchanged for fiat currency, then no matter how advanced the technology and models are, they are mere talk.