Clarifying the six major misconceptions about stablecoins

Authors: Shen Jiangguang, Zhu Taihui

Since the second half of 2023, stablecoins have entered a rapid growth track, with the current market size reaching about 250 billion US dollars and more than 250 million active accounts. At the same time, countries have taken advantage of the trend and actively supported the development of their own stablecoins, such as the European Union, Japan, Singapore, the United Arab Emirates, Hong Kong, China and other countries/regions have introduced bills to regulate the innovative development of stablecoins, and more than 10 major countries such as the United Kingdom, Australia, and South Korea have also announced relevant legislative plans since 2025. The global market recognition and policy recognition of stablecoins are rapidly improving.

In particular, the recent passage of the U.S. "GENIUS Act" in the Senate has greatly increased the probability of being passed by Congress, which will further promote the development of the stablecoin market. Recently, Citibank's forecast shows that under the optimistic scenario, the stablecoin market will reach $3.7 trillion in 2030, becoming a key force affecting the global monetary and financial landscape.

However, there are still six misunderstandings about stablecoins in China: there is a conflict between stablecoins and central bank digital currencies, and stablecoins will exacerbate the risk of illegal financial activities. These misunderstandings involve not only the functional positioning and stability attributes of stablecoins, but also the relationship between stablecoins and central bank digital currencies, as well as the impact of stablecoins on monetary sovereignty, currency internationalization and illegal financial activities, resulting in a lack of policy consensus on the development of offshore or onshore RMB stablecoins. ****

Next, we should quickly clarify these misconceptions, comprehensively and objectively understand the functional attributes and strategic value of stablecoins, steadily promote the development of offshore RMB stablecoins, lay a foundation for the development of onshore RMB stablecoins, and provide a new engine for the internationalization of the RMB.

Since the second half of 2023, stablecoins have entered a rapid growth track, with the current market size exceeding 230 billion US dollars and more than 250 million active accounts. At the same time, countries have taken advantage of the trend and actively supported the development of their own stablecoins, such as the European Union, Japan, Singapore, the United Arab Emirates, Hong Kong, China and other countries/regions have introduced bills to regulate the innovative development of stablecoins, and more than 10 major countries such as the United Kingdom, Australia, and South Korea have also announced relevant legislative plans since 2025. The global market recognition and policy recognition of stablecoins are rapidly improving. In particular, the recent passage of the U.S. "GENIUS Act" in the Senate has greatly increased the probability of being passed by Congress, which will further promote the development of the stablecoin market. Recently, Citibank's forecast shows that under the optimistic scenario, the stablecoin market will reach $3.7 trillion in 2030, becoming a key force affecting the global monetary and financial landscape.

However, there are still many misunderstandings in the understanding of stablecoins in China, which involve not only the functional positioning and stability attributes of stablecoins, but also the relationship between stablecoins and central bank digital currencies, and the impact of stablecoins on monetary sovereignty, currency internationalization and illegal financial activities, resulting in a lack of policy consensus on the development of offshore or onshore RMB stablecoins. Next, it is necessary to clarify these misunderstandings as soon as possible, comprehensively and objectively understand the functional attributes and strategic value of stablecoins, and steadily promote the development of offshore RMB stablecoins, so as to lay a foundation for the development of domestic RMB stablecoins and provide a new engine for RMB internationalization.

Misconception 1: Equating stablecoins with general cryptocurrencies.

In the discussion of stablecoins, some views have broadly equated stablecoins with cryptocurrencies, arguing that stablecoins are completely decentralized, highly volatile in price, lack of value support, and too risky. From a conceptual point of view, a cryptocurrency is a digitally represented value recorded using distributed ledger technology or other similar technologies, giving the holder the power and economic rights to own and use it. However, there are many types of cryptocurrencies, and stablecoins are one of the more special ones, which are very different from cryptocurrencies in the general sense such as Bitcoin, Ethereum, and Dogecoin in terms of functional attributes and governance mechanisms.

From the perspective of functional attributes, this understanding lacks a structural understanding of cryptoassets. Specifically, there are five specific types of cryptoassets: CBDCs, stablecoins (mainly fiat-backed stablecoins), tokenization of financial products and real-world assets (RWA), off-chain asset-backed tokens (Bitcoin, Ethereum), and meme coins (Trumpcoin, Dogecoin). Among them, stablecoins, especially fiat-backed stablecoins, not only have the stability and credibility characteristics of fiat currencies, but also have the advantages of decentralization, globalization, transparency, and high efficiency brought by blockchain to crypto assets. Historically, although there have been moments when the value of stablecoins has fallen below the promised face value and some risk events, they are generally stable, and with the improvement of the issuance management mechanism and the regulatory system of various countries, the stability of the value of stablecoins is getting higher and higher.

From the perspective of transaction governance, this understanding also does not analyze the technical differences behind stablecoins. The issuance and trading of crypto assets such as Bitcoin and Ethereum rely on consensus algorithms such as Proof-of-Work (PoW) and Proof-of-Stake (PoS), which are completely decentralized, and the price is completely determined by both the supply and demand sides of the market. Most stablecoins such as USDC and USDT are issued centrally by the issuer (decentralized stablecoins account for a small proportion and are managed by protocols and smart contracts), and the value is proved by the issuer's asset reserves (information disclosure and audit reports of the supporting assets behind the stablecoins, etc.), and the issuer retains the right to freeze abnormal accounts and adjust the parameters of smart contracts, which has the characteristics of semi-centralized governance. For example, the GENIUS Act in the United States requires stablecoin issuers to have the technical capacity to comply with lawful orders to seize, freeze, burn, or block the transfer of issued stablecoins.

It is precisely because of the substantial differences between stablecoins and narrow cryptocurrencies such as Bitcoin that the EU, Japan, Singapore, the UAE, Hong Kong, and the United States, which are formulating stablecoin and cryptocurrency legislation, classify general cryptocurrencies as financial assets (such as securities) while viewing stablecoins as payment tools (payment stablecoins), and have established or applied completely different regulatory frameworks.

Misconception 2: The value of stablecoins is not stable

In the history of development, there have been several risk events of value depegging in stablecoins. For example, in April 2017, the price of the US dollar stablecoin USDT fell to $0.92, in May 2022, the algorithmic stablecoin TerraUSD (UST) crashed, and in 2023, the price of the US dollar stablecoin USDC plummeted below $0.87 due to the collapse of Silicon Valley Bank (at that time, $3.3 billion of USDC's approximately $40 billion reserves were deposited in Silicon Valley Bank), and the prices of other smaller stablecoins also fell below the promised value from time to time. In this regard, some believe that stablecoins are not stable. Behind this view, there is a lack of understanding of the stability mechanism of stablecoins and the management of reserve assets.

First of all, it is necessary to objectively understand the different types and stable performance of stablecoins. According to the value support behind stablecoins, stablecoins can be divided into four categories: fiat-backed stablecoins (such as USDC, USDT), cryptocurrency-backed stablecoins (such as DAI), gold, silver and commodities and other physical-backed stablecoins (such as PAXG), and algorithmic stablecoins. From the perspective of price stability, algorithmic stablecoins lacking asset support are the lowest, followed by cryptocurrency stability, and fiat currency stablecoins and physical stablecoins are the highest. At present, the stablecoin with the largest issuance and trading volume is the fiat currency stablecoin, accounting for more than 95% of the market. In this regard, most stablecoins are indeed backed by fiat currencies or assets and are stable, while algorithmic stablecoins are relatively unstable. Because of this, in the regulatory regulations of various countries, including the "GENIUS Act" in the United States, algorithmic stablecoins are not included in the scope of regulatory recognition.

Second, stablecoin issuers are constantly improving the transparency and stability of their reserve assets. USDT, the largest stablecoin, has long been controversial about its transparency, but recently with the development and implementation of regulatory policies in various countries, they have also hired a chief financial officer and announced that they will hire a global accounting firm to conduct a standardized audit of their reserve assets, which is a big step forward in transparency. USDC, the second-largest stablecoin, has been an industry model for transparency and compliance, with its issuer, Circle, undergoing a monthly review of its reserve assets by an independent auditor and disclosing the structural status of its reserve assets on a weekly basis. In addition, Circle is also advocating for the construction of a "Token Capital Adequacy Framework" (TCAF), which adopts a dynamic risk-sensitive model, starting with stress testing reserves and stakeholder input, while considering technical risks such as blockchain network performance and cybersecurity, exceeding the capital adequacy requirements of Basel III for banks. The transparency, compliance, and stability mechanism of the two leading stablecoin issuers have been followed by the entire stablecoin market.

In addition, the regulatory mechanisms for the operation and management of stablecoin issuers in various countries are also being improved at an accelerated pace. Since 2022, Japan, the European Union, the United Arab Emirates, Singapore, Hong Kong, China and other countries/regions have successively issued stablecoin regulatory bills, all of which have made clear requirements for stablecoin issuers in terms of license access, operation and management (involving the issuer's business scope, corporate governance, capital, liquidity and risk management, etc.), reserve asset investment and customer payment, anti-money laundering and anti-terrorist financing, etc., and the regulatory framework for stablecoin issuance and trading has become clearer and more perfect. The GENIUS Act in the United States sets targeted capital, liquidity and risk management requirements for stablecoin issuers, and requires issuers to submit monthly liquidity reports and reserve composition reports certified by the CEO and CFO, and to be audited annually. The improvement and implementation of the regulatory framework provides additional guarantees for the stability of stablecoins.

Misunderstanding Three: There is a conflict between stablecoins and central bank digital currencies

The fiat currency stablecoin is a fiat currency tokenization (Token) promoted by market institutions, which can be mainly used for the transaction settlement of crypto assets and the payment of physical cross-border trade after issuance, and the transaction is decentralized; The central bank digital currency is the fiat currency tokenization launched by the central banks of various countries, and the overall issuance management is based on a centralized database architecture. For this reason, some argue that the use of stablecoins will inhibit the use of CBDCs, and that the "decentralized" nature of stablecoins conflicts with the centralized management of payment systems by central banks. This view is a lack of recognition of the complementarity and coexistence of the two.

There is a clear complementarity between the use scenarios of fiat stablecoins and central bank digital currencies. The retail central bank digital currency (such as digital yuan) launched by various countries is mainly used in domestic living payment, catering services, transportation, shopping consumption, government services and other fields, and some countries have launched wholesale central bank digital currencies for settlement between financial institutions. In the future, stablecoins will be mainly used in cross-border B2B settlement, offshore market circulation and crypto asset trading, and DeFi ecology, with decentralized transactions and "payment as settlement" (simultaneous settlement PvP of transaction payment), which has obvious advantages over the current bank cross-border payment and settlement system in terms of cost and efficiency of cross-border payment. Existing bank cross-border remittances usually take up to 5 working days to settle, and the average cost rate of cross-border remittances is around 6.35% (World Bank data), but cross-border payments based on stablecoins basically implement real-time settlement, and the longest settlement time will not exceed 1 hour, and the average cost of many high-performance blockchains to send stablecoins is less than $1. More importantly, the goal and mission of central banks is to maintain price stability and stable and rapid economic growth through monetary policy regulation, not to maximize the issuance and circulation of central bank currency (central bank digital currency).

At the same time, the decentralized nature of stablecoins and the management model of central bank digital currencies can also coexist. In terms of technical architecture, the current digital yuan in China has done hierarchical processing on the system behind it, the core system adopts a centralized traditional architecture to achieve high performance, and at the same time, the distributed ledger is used to ensure the consistency of the central bank and commercial banks on the ownership information of the central bank digital currency in the confirmation and registration, which is to explore the collaboration between centralized management and decentralized ledger. In terms of business operation, in October 2022, the Hong Kong Monetary Authority (HKMA) cooperated with the BIS Innovation Centre to launch the Aurum project, a digital currency system that mixes central bank digital currencies and stablecoins, and establishes two different types of tokens at the wholesale layer - intermediary CBDCs (direct liabilities of the central bank) and CBDC-backed stablecoins (liabilities of the issuers, whose backing assets CBDCs are held by the central bank). It is also actively exploring the mode of co-operation of decentralized trading stablecoins and centrally managed central bank digital currencies.

In addition, the current policy orientation of major countries has shifted to support the joint development of stablecoins and central bank digital currencies. On the one hand, according to the 2024 survey statistics of the Bank for International Settlements (BIS), the current interest in central bank digital currencies in countries around the world has increased significantly, and the number of countries and regions exploring experiments has reached about 100. On the other hand, the European Union, the United Arab Emirates, Singapore, Hong Kong, China and other countries and regions have issued regulations on stablecoins and cryptocurrencies, and in 2025, the legislative process of major countries in the world to support the development of stablecoins and cryptocurrency compliance and innovation will be significantly accelerated, and the United Kingdom, Australia, Japan, South Korea, Turkey, Argentina, Nigeria, etc. have announced plans to formulate stablecoins and cryptocurrency bills. It can be seen that the main policy line of various countries has shifted to support the integrated development of stablecoins, cryptocurrencies and central bank digital currencies.

Misunderstanding 4: Stablecoins harm the sovereignty of domestic currency

Stablecoin trading has significant decentralization and globalization attributes, and some believe that the development of stablecoins will lead to the substitution of domestic sovereign currencies and weaken the central bank's ability to regulate monetary policy. This view is that the understanding of the use and management of stablecoins and the regulation of monetary policy is not in place, and the concerns behind it do not exist from the perspective of development history or policy practice, or can be eliminated through institutional design.

For monetary sovereign substitution, it can be solved by restricting the domestic use of stablecoins and the management of stablecoin reserve assets. For some countries, especially small countries, the large-scale use of fiat currency stablecoins in other countries within their own borders will indeed have a crowding out effect on the circulation and use of their own currencies. However, in the process of issuing stablecoins, in order to limit the impact of foreign currency stablecoins such as US dollar stablecoins on domestic local currency circulation and payment, the regulatory laws of the European Union and the United Arab Emirates and other countries/regions have made targeted arrangements, such as restricting or prohibiting the use of foreign currency stablecoins in domestic transaction payments. At the same time, for the management of reserve assets of stablecoins, the common regulatory requirement of various countries is that the issuer of the local currency stablecoin needs to hold the reserve funds in a financial institution in its own country/region and invest in assets denominated in the local currency. For example, the GENIUS Act of the United States clearly requires that the investment scope of stablecoin reserves is mainly US dollar assets in the United States, including US dollar cash, short-term US Treasury bonds, Federal Reserve bills, money market funds and central bank deposits. This not only avoids the risk of currency substitution, but also reduces the risk of currency sovereign substitution.

The impact on monetary policy regulation can be solved through the gradual development of stablecoins and central bank open market operations. In terms of issuance, in order to alleviate the impact of the rapid development of stablecoins on the existing monetary system and monetary policy in a short period of time, the EU Crypto-Asset Market Supervision Act (MiCA) requires that the daily trading volume of a single asset reference token (ART) and electronic currency token (EMT) shall not exceed 5 million euros, and when the market value of ART and EMT exceeds 500 million euros, the issuer needs to report to the regulator and meet additional requirements. In terms of use, it is possible to adopt the promotion path of "offshore first, then onshore and finally domestic" (such as the United Arab Emirates), first limiting the use of "eligible people" and then gradually liberalizing the use of users, first limiting local use scenarios such as financial transactions and payments, and then continuously liberalizing use scenarios. In addition, from the perspective of the development history of Eurodollar and petrodollar, the US dollar is still affected by the Federal Reserve's monetary policy regulation after globalization, and the reserve assets behind fiat currency stablecoins are still denominated in local currencies and traded in their own countries, which are still affected by the monetary policy regulation of their own central banks, and the central bank can also include local currency stablecoins in open market operations.

Myth Five: Stablecoins Are Not Beneficial for the Internationalization of the Local Currency

This view is mainly aimed at the internationalization of the renminbi. At present, China is actively promoting the development of the RMB cross-border payment system (CIPS system), and at the same time promoting the integration of CIPS and the multilateral central bank digital currency bridge (mBridge) project, as an important channel to promote the internationalization of the RMB, and the current CIPS participating institutions have covered 185 countries and regions. Therefore, there is a view that the issuance and trading of RMB stablecoins is not conducive to the development of the CIPS system and the promotion of RMB internationalization. However, this view is specious and inaccurate in understanding the role of stablecoins in promoting currency internationalization.

On the one hand, the breakthrough development of RMB internationalization requires the RMB stablecoin as a new engine. In recent years, with the support of measures such as promoting CIPS, expanding local currency swap agreements, and increasing the use of RMB in Belt and Road investment and trade, the proportion of RMB in global payments has risen to the fourth place, but there is a large gap between the market share (3.75% in December 2024) and the US dollar (49.12%), especially the use of RMB in international payments with the participation of non-Chinese enterprises. As of May 2025, the transaction size of stablecoins in the past 12 months has reached 7 trillion US dollars (33.2 trillion US dollars before adjustment), and the number of transactions has reached 14 trillion (51 trillion before adjustment), and the transaction scale in 2024 will exceed the combined payment scale of VISA and Mastercard, gradually becoming the mainstream payment method for cross-border transactions. Actively promoting the use of RMB stablecoins in cross-border trade and international settlement will be an important starting point for the internationalization of RMB, and it does not conflict with promoting the internationalization of RMB through the expansion and application of CIPS.

At the same time, the development of RMB stablecoins will help reduce the uncertainty faced by the central bank digital currency bridge. Although the digital yuan can be used for cross-border payments through multilateral digital currency bridges to enhance the internationalization level of the yuan, it has entered the minimum viable product (MVP) stage in June 2024. However, in the case of BIS withdrawing from the "digital currency bridge" project and switching to support the Agora project led by the US and European central banks, there is some uncertainty about the development prospects of the "digital currency bridge". Increasing the proportion of RMB in international payment and settlement through RMB stablecoins will help make up for the shortcomings of e-RMB in offshore scenarios and the uncertainty faced by the development and promotion of central bank digital currency bridges.

Myth Six: Stablecoins Will Intensify the Risk of Illegal Financial Activities

Stablecoins are based on blockchain issuance and trading, which has the characteristics of decentralization, globalization, anonymity, and irrevocable transactions, and the bridge technology strengthens the interconnection of different blockchains, making it easier for money launderers to hide their identities and sources of funds. For this reason, some believe that stablecoins increase the risk of illegal financial activities such as money laundering and capital flight. These understandings are somewhat outdated and do not follow well the development of anti-money laundering technology in the cryptocurrency space, as well as the development of regulatory regimes such as anti-money laundering in the cryptocurrency field.

Blockchain technology can also be used to monitor the flow of funds in stablecoins. Since the launch of cryptocurrency, there have been institutions and experts researching and designing the expression mode of crypto assets to record the process information of digital currency transfer transactions in the expression of cryptocurrency. At the same time, as early as 2019, BIS research pointed out that for stablecoin and cryptocurrency transactions based on blockchain and distributed ledger, financial regulators can apply blockchain and distributed ledger technology to financial supervision, and implement "embedded supervision" of stablecoins and cryptocurrencies. At the same time, some countries are also exploring the promotion of blockchain key node supervision and governance community supervision.

In addition, at present, some blockchain technology companies have developed multi-node data encryption processing technology, which uses a distributed data management system to conduct real-time statistics and analysis of the specific flow and changes of capital while ensuring the safety of capital, tracking the process of funds from source to destination, and revealing the source, destination and connection between funds. These technologies can be fully used in the anti-money laundering and regulation of illegal financial activities in stablecoin transactions. For instance, in August 2024, the TRON blockchain (TRON), the stablecoin USDT, and TRM jointly formed the T3 Financial Crime Prevention Coalition (T3 FCU), which froze more than $130 million in cryptocurrency illegal proceeds in 2024 in cooperation with law enforcement agencies in various countries.

The global regulatory regime for anti-money laundering and illicit financial activities is also rapidly improving. In response to the potential money laundering risks in stablecoin and cryptoasset transactions, the Global Financial Action Task Force (FATF) has updated the International Standard against Money Laundering, Terrorist Financing and Proliferation Financing: FATF Recommendations, which explicitly includes stablecoins and cryptocurrency (virtual asset) activities and service providers (VASPs) in the international anti-money laundering and counter-terrorist financing standards. The application of the Travel Rule extends to virtual asset products and services. At the same time, the European Union, Japan, Singapore, Hong Kong, etc. have also proposed targeted anti-money laundering and anti-terrorist financing regulatory schemes for cryptocurrency trading services, such as the European Union's "Funds Transfer Regulation", which requires any amount of cryptocurrency transfers between cryptocurrency service accounts to follow "travel rules". The GENIUS Act also imposes specific anti-money laundering compliance requirements for stablecoin transactions, and requires issuers to have the technical capabilities to seize, freeze, and block illegal stablecoin transactions.