The global virtual asset market, primarily driven by cryptocurrency, has experienced explosive growth from 2018 to 2024. During this period, the cryptocurrency market expanded by 24 times, reaching a staggering $3.3 trillion—equivalent to 2.6% of the traditional stock market. This remarkable growth underscores the sector's immense potential. This year, Hong Kong has enacted legislation for stablecoins, set to take effect in August, while the U.S. Senate has passed the GENIUS Act for stablecoin regulation, now under review in the House of Representatives. As stablecoins play a pivotal role in the emerging global monetary order, investors must understand and prepare for their implications.
Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging to fiat currencies like the U.S. dollar, Hong Kong dollar, euro, or yen, or to physical assets such as gold. They act as a bridge between traditional fiat money and digital currencies, providing a reliable store of value and medium of exchange with minimal price volatility. This makes them a rare low-volatility asset in the crypto space. In recent years, fiat-backed stablecoins have gained traction worldwide, emerging as a new payment tool. Their market capitalization has surged 46-fold over five years, reaching $235 billion by the end of March this year, with nearly all of it tied to the U.S. dollar.
How Stablecoins Reinforce the U.S. Dollar
The United States currently faces a national debt exceeding $36 trillion, with daily interest payments surpassing $2.3 billion. The proposed GENIUS Act aims to establish a "digital U.S. Treasury refinancing" mechanism, effectively digitizing and retailing Treasury bonds. This move addresses weakening demand for U.S. debt, ensuring the government can continue refinancing old debt with new issuances to maintain fiscal sustainability. The bill mandates that all qualified stablecoin issuers back their coins with 100% reserves in cash or U.S. Treasury bonds.
For example, when an investor buys one USDC stablecoin with one U.S. dollar, the issuer (like Circle, recently publicly listed) uses that dollar to purchase U.S. Treasuries or hold it as cash. This provides the U.S. Treasury with new funds while maintaining the stablecoin's 1:1 peg to the dollar. This creates a closed loop between digital dollar issuance and demand for Treasuries, effectively turning global stablecoin users into indirect retail buyers of U.S. debt. Analysts suggest that if stablecoin issuance grows from the current $200 billion to a projected $2 trillion, it could provide the U.S. with a substantial, low-cost source of continuous funding.
Hong Kong’s Strategic Role in the New Monetary Landscape
Hong Kong's stablecoin regime is scheduled to take effect on August 1st this year. Licensed issuers, such as financial institutions and virtual asset platforms, will be permitted to offer stablecoins to the public. Initially, these stablecoins are expected to be pegged to the U.S. dollar and Hong Kong dollar, with future plans to include the Chinese yuan. This approach allows China to increase the international flow of the yuan without fully opening its capital account, supporting cross-border trade settlements in yuan and acting as a strategic "sandbox" for人民币国际化 (renminbi internationalization).
This explains why两大国际金融中心 (two major international financial centers), Hong Kong and the U.S., are actively developing stablecoins. It reflects a broader monetary博弈 (contest) between China and the United States. The world is on the brink of a stablecoin ecosystem explosion. As stablecoins gain official acceptance and their circulation increases, they will drive reform in the global monetary system.
The Functional Advantages of Stablecoins
Stablecoins offer several key advantages that position them to disrupt traditional finance:
- Efficient Cross-Border Transactions: They can bypass geographical restrictions, enabling cross-border transfers in minutes without relying on traditional banking systems.
- 24/7 Settlement and Low Cost: Transactions can be conducted around the clock with near-instant settlement and minimal fees, significantly reducing payment risks and costs for investors.
- Core Utility in Crypto Markets: They serve as the universal token for cryptocurrency trading and are a foundational element of the decentralized finance (DeFi) ecosystem.
- Reduced Reliance on Legacy Systems: Their application can lessen dependence on the U.S. dollar and the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network for international payments.
However, the rise of stablecoins does not signify the birth of a new "super-sovereign" currency. More accurately, they are payment tools—an extension of existing fiat currencies under regulation—with no inherent appreciation value. Their primary function is to facilitate transactions.
Potential Risks and Challenges
Of course, stablecoins are not without drawbacks or risks. Issuers face potential issues like insufficient reserves, bank runs, theft, or bankruptcy. Sudden large-scale redemptions could trigger a sell-off of reserve assets, exacerbating market volatility. Furthermore, widespread stablecoin adoption could diminish the role of central and traditional banks, making it more difficult for economies to implement effective fiscal and monetary policies. The regulatory landscape for crypto assets is also subject to sudden and significant changes.
Recently, the Bank for International Settlements (BIS) stated that stablecoins fail to pass the three main tests for any currency. Some analysts suggest that U.S. approval of stablecoins and the inclusion of various cryptocurrencies on the Nasdaq Crypto Index may signal a shift from the current Ethereum-dominated ecosystem to a multi-chain architecture for stablecoins. This could lead to massive expansion and, combined with leveraged operations in capital markets, result in the uncontrolled global issuance of dollar derivatives. This could passively devalue the U.S. dollar. The alarming aspect is that even the U.S. government cannot directly track these derivatives, and the Federal Reserve lacks tools to recall them. This represents a monetary mutation in the post-dollar hegemony era, with unpredictable outcomes.
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Frequently Asked Questions
What exactly is a stablecoin?
A stablecoin is a type of cryptocurrency designed to have a stable value, unlike more volatile cryptocurrencies like Bitcoin. This stability is typically achieved by pegging its value to a reserve asset like a fiat currency (e.g., the U.S. dollar) or a commodity like gold.
How do stablecoins impact traditional banking?
They pose a potential challenge to traditional banks by enabling faster, cheaper peer-to-peer and cross-border payments outside the conventional banking system. This could reduce the dominance of banks in payment processing and settlement.
Are stablecoins safe to use?
While they offer stability compared to other crypto assets, risks remain. These include the potential for an issuer to become insolvent and fail to honor redemptions, technical vulnerabilities leading to hacks, and evolving regulatory uncertainties that could affect their use and value.
What is the difference between a stablecoin and a central bank digital currency (CBDC)?
A stablecoin is typically issued by a private company, while a CBDC is a digital form of a country's fiat currency issued and backed by its central bank. CBDCs are direct liabilities of the central bank, whereas stablecoins are liabilities of their private issuers.
Why are Hong Kong and the U.S. so focused on regulating stablecoins?
As major financial hubs, they aim to harness the innovation and efficiency of stablecoins while mitigating their risks to financial stability, consumer protection, and monetary policy. Regulation provides a framework for safe adoption and prevents misuse.
Can stablecoins truly help internationalize the Chinese yuan?
Potentially. By creating yuan-pegged stablecoins in a controlled environment like Hong Kong, China can facilitate greater use of the yuan in international trade and finance without immediately relaxing capital controls on the mainland, serving as a strategic testbed.
Conclusion: Navigating the Transition
Stablecoins are set to be a significant part of world monetary reform, making it essential for investors to understand them. In this transition period between old and new monetary orders, maintaining a diversified portfolio, including tangible assets like physical gold, remains a prudent strategy for preserving wealth. The future of finance is digital, and stablecoins are at the forefront of this transformation.