On Stablecoins: Reflections from an Economic Perspective

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The rise of stablecoins has sparked intense global debate, reshaping not only financial infrastructure but also the future of monetary systems. Originally delivered as a keynote speech by Li Xiao at a closed-door seminar hosted by the New Economist Think Tank titled The Future of Stablecoins, this article offers a historically grounded, analytically rigorous perspective on the origins, implications, and strategic responses to stablecoin development—particularly in the context of U.S. policy shifts and China’s positioning.

The Historical Logic Behind Stablecoin Emergence

To understand stablecoins, we must first widen our historical lens. Over 5,000 years, money has evolved from commodities to metallic coins, then to fiat currencies backed by state credit. This evolution reveals three enduring patterns:

  1. Centralized control over money issuance, transitioning from monarchs to central banks.
  2. Monetary policy serving fiscal needs, especially deficit financing for war or economic stabilization.
  3. Inevitable inflation, driven by governments' inherent incentive to expand the money supply.

Only during the gold standard era (early 18th to early 20th century) was this inflationary impulse constrained—enabling unprecedented industrial growth and price stability. The Bretton Woods system later replicated this logic: the U.S. dollar, pegged to gold at $35 per ounce, acted as a de facto global stablecoin.

But when President Nixon closed the gold window in 1971, that anchor vanished. Unleashed from physical constraints, monetary expansion accelerated. The Federal Reserve became the world’s de facto central bank, and the U.S. transitioned from a territorial empire to a financial empire, maintaining dominance through deep capital markets and dollar-denominated debt.

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In this context, stablecoins represent the next phase: tokens built atop blockchain networks that replicate traditional credit instruments. Just as paper money once represented claims on gold, today’s stablecoins are claims on fiat—primarily the U.S. dollar. They are, in essence, tokens of tokens. And just as governments once monopolized paper currency, they now seek to regulate and harness stablecoins—extending their reach into decentralized finance.

This trajectory suggests that stablecoin legalization isn’t a radical break but a continuation of state-driven monetary expansion.

The Multifaceted Impact and Challenges of Stablecoins

1. A Paradigm Shift in Monetary Theory

Stablecoins challenge foundational economic assumptions:

Now, with private entities issuing dollar-pegged tokens like USDT and USDC, we enter an era of multi-tiered liquidity—where central bank money coexists with privately issued digital liabilities.

Moreover, stablecoins blur the line between “money” and “payment instruments.” As Hayek argued, what matters isn’t legal definition but market acceptance. In practice, we’re moving toward a spectrum of moneyness, where different assets serve transactional roles depending on context.

2. Reinforcing Dollar Hegemony Through Digital Infrastructure

While some view stablecoins as a threat to the dollar, they may actually strengthen it.

Consider this: most major stablecoins are pegged to the U.S. dollar and backed by short-term U.S. Treasury bills. When investors buy stablecoins, they indirectly invest in American debt. Redemption triggers bond sales—creating a market-driven feedback loop between crypto markets and fiscal policy.

Though currently small—stablecoin holdings in Treasuries total around $250 billion compared to $36+ trillion in total U.S. debt—the potential is significant. Projections suggest stablecoin-linked Treasuries could exceed $1 trillion by 2030.

More importantly, stablecoins offer a new layer of dollar-based financial infrastructure. By integrating blockchain with cross-border payments, the U.S. can bypass legacy systems like SWIFT and build faster, cheaper settlement rails—anchoring global trade in digital dollars.

The passage of legislation like the proposed GENIUS Act signals a strategic shift: treating stablecoins not just as financial products but as strategic digital assets vital to maintaining U.S. monetary primacy.

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3. Systemic Risks and Regulatory Dilemmas

Despite their name, stablecoins aren’t inherently stable.

Their value depends on:

History shows that when private institutions manage public functions—like money creation—moral hazard emerges. If stablecoin issuers leverage reserves for risky investments, a run on these tokens could trigger broader financial instability.

Furthermore, the trend toward increasingly abstract forms of money—from gold → paper → digital → tokenized debt—echoes Giovanni Arrighi’s theory of financialization cycles. Each phase sees capital shifting from production to speculation, often preceding systemic crises.

With inflationary pressures rising globally and fiscal deficits growing, stablecoin expansion may accelerate this cycle—flooding markets with liquidity while weakening accountability.

4. Obstacles to Global Monetary Coordination

Stablecoins complicate international regulation:

This creates fertile ground for illicit activities: money laundering, tax evasion, terrorism financing. Without coordinated frameworks, global financial stability remains vulnerable.

Yet reform is difficult. Unlike trade systems, where power shifts more fluidly, monetary hierarchy is sticky. Even if confidence in the dollar wanes, there’s no automatic successor. Euro and renminbi lack sufficiently deep capital markets to fill the void.

Strategic Considerations for China

China cannot afford passive observation in this transformation.

1. Position Hong Kong as a Testbed—Not a Weapon

Hong Kong’s proposed Stablecoin Bill should not be seen primarily as a tool for geopolitical competition. Instead, it should function as a controlled environment for innovation.

Given Hong Kong’s currency board system—pegging the HKD to USD—the natural path is to anchor any local stablecoin to U.S. dollars and high-grade Treasuries. Attempting to force linkage with offshore RMB or digital yuan would destabilize the peg and risk Hong Kong’s status as a financial hub.

Rather than direct confrontation, Hong Kong can pilot use cases in cross-border payments—offering a regulated gateway for testing RMB-linked applications without compromising financial stability.

2. Shift from “Outward Push” to “Inward Reform” in RMB Internationalization

For years, China focused on external levers: promoting RMB in trade settlements, building offshore centers, signing central bank swaps. But true internationalization stems not from usage mandates—it arises organically when foreign investors want to hold your assets.

The key lies in domestic financial deepening: creating open, liquid, rule-based markets where global actors can confidently invest in RMB-denominated bonds, equities, and derivatives.

Without such depth, no amount of technological innovation—including digital yuan or stablecoins—can achieve lasting international traction.

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Technology alone cannot enable “leapfrogging.” Efficiency without credibility leads nowhere. As history shows, monetary competition is ultimately institutional competition—rooted in legal frameworks, regulatory transparency, and investor protection.

Frequently Asked Questions (FAQ)

Q: What exactly is a stablecoin?
A: A stablecoin is a type of cryptocurrency designed to maintain a stable value by being pegged to a reserve asset—most commonly the U.S. dollar. Examples include USDT (Tether) and USDC (USD Coin), which are backed by cash equivalents like Treasury bills.

Q: Are stablecoins safe?
A: Their safety depends on transparency and regulation. While many claim full backing, audits vary in rigor. Regulatory frameworks like those proposed in the U.S. or Hong Kong aim to enforce reserve requirements and operational standards to reduce risk.

Q: Can stablecoins replace traditional currencies?
A: Not fully—at least not yet. They complement existing systems by improving payment efficiency, especially across borders. However, widespread adoption as primary money requires stronger legal recognition and integration with mainstream finance.

Q: How do stablecoins affect monetary policy?
A: They challenge central banks’ control over money supply. If widely adopted, they could limit the effectiveness of interest rate adjustments and quantitative easing—especially if large portions of liquidity operate outside traditional banking channels.

Q: Is China developing its own stablecoin?
A: Not directly under that label. Instead, China is advancing the digital yuan (e-CNY) and exploring regulated tokenized financial instruments. These efforts focus on domestic control and cross-border pilot programs rather than decentralized models.

Q: Do stablecoins threaten the U.S. dollar?
A: Paradoxically, most reinforce dollar dominance by being pegged to it. Rather than undermining the greenback, they extend its reach into digital ecosystems—making the dollar more pervasive than ever before.

Core Keywords:

By understanding stablecoins not merely as technological novelties but as instruments embedded in broader historical and geopolitical currents, we gain clearer insight into their transformative potential—and profound risks.