Wang Yongli: The rapid development of USD-backed stablecoins offers a profound warning

Former Vice President of the Bank of China argues USD-backed tokens boost U.S. strategic advantage—and pose a challenge for China.

The East is Read, our sister newsletter, recently shared three discussions on stablecoins by Chinese experts.

Yang Tao: China should develop a yuan-backed stablecoin ASAP

Chinese economists on prospects of yuan-backed stablecoins

Yang Tao: China should develop a yuan-backed stablecoin ASAP

The debate about stablecoins in China is ongoing and expanding. Today, we are following up with a recent commentary from Wang Yongli, Co-Chairman of the Board of Digital China Information Service Group Co Ltd, former General Manager of China International Futures Co(CIFCO). and former Vice President of the Bank of China (BOC), one of the four largest commercial banks in China. He also served as the first Chinese mainland member of the board of SWIFT.

This excerpted article by Wang was first published in his personal WeChat blog on June 3, 2025.

王永利 |美元稳定币加快发展带来深刻警示

Wang Yongli: The rapid development of USD-backed stablecoins offers a profound warning

Through legislative measures, the United States protects and supports the mining and trading of crypto assets and even considers them as part of a national strategic reserve. It also legitimises the operation of USD-backed stablecoins, actively seizing the high ground in crypto assets and stablecoins. These efforts enhance demand for U.S. Treasury bonds and the global influence of the dollar, carrying significant and far-reaching strategic implications. China must pay close attention and respond proactively.

The emergence and accelerated growth of USD-backed stablecoins

Bitcoin and its underlying blockchain technology officially debuted in early 2009. However, due to its lack of convertibility into fiat currency and limited real-world use cases, it initially had minimal societal impact. On May 22, 2010, someone in the U.S. used 10,000 Bitcoins to purchase two pizzas worth $25, marking the first-ever exchange of Bitcoin for fiat currency and valuing each Bitcoin at just $0.0025.

Building on the Bitcoin blockchain, Ether (ETH) and its underlying blockchain, Ethereum, emerged in 2013. To enhance efficiency, Ethereum replaced Bitcoin’s Proof of Work (PoW) consensus mechanism, which requires participation from all nodes, with the more efficient Proof of Stake (PoS), which relies on a smaller subset of nodes. Ethereum also introduced smart contracts and the ERC-20 token standard, facilitating the creation of new cryptocurrencies. These innovations paved the way for Initial Coin Offerings (ICOs), which not only provided practical applications for Bitcoin and Ether but also boosted their market value and greatly expanded their societal impact.

Bitcoin, Ether, and similar assets are native blockchain-based crypto assets. In contrast, those issued through ICOs are derivative crypto assets that more closely resemble securities, even though issuers often label them as “cryptocurrencies.” The two are not entirely the same.

Advocates of “cryptocurrencies” hope and claim that they can disrupt or replace existing fiat (sovereign) currencies. However, Bitcoin, Ether, and similar assets have predetermined issuance schedules that are hard-coded into their systems and cannot adjust to changes in the volume of tradable wealth. Their prices are highly volatile, failing to meet the essential requirement for money to be a stable unit of account. Thus, they cannot serve as true currencies.

(This is also why gold inevitably withdrew from being used as money and reverted to a tradable asset, and why money must break away from any physical commodity with a limited supply. True money must be able to expand or contract in tandem with the value of tradable wealth and act purely as a unit of account and a transferable store of value—this is the essence of so-called “credit money.”)

Therefore, the value of cryptocurrencies ultimately depends on their exchangeability into fiat currency. Bitcoin, Ether, and similar assets represent new forms of digital assets but cannot function as true money, nor can they supplant or replace sovereign currencies.

However, as long as Bitcoin and similar crypto assets are legally recognised, they can be traded like gold in spot and forward markets, as well as through futures, options, ETFs, ETPs, and other derivatives. Furthermore, their borderless and blockchain-native nature makes them inherently suited for continuous, global, 24/7 online trading.

Traditional fiat currency payment and settlement systems, however, cannot meet the demand for continuous, global, 24/7 online transactions. To facilitate the growth of cryptocurrency trading, a bridge was needed between crypto assets and fiat currencies. This led to the creation of USDT, a U.S. dollar-pegged stablecoin that runs on blockchain technology and operates globally, around the clock, via the public internet.

USDT, short for “Tether USD,” is a stablecoin issued by Tether Ltd. backed on at least a 1 : 1 basis by reserves in U.S. dollar cash, deposits, or highly liquid assets such as U.S. Treasury bonds. Tether Ltd., originally named Realcoin, was a privately funded company registered in the Isle of Man and Hong Kong in 2013. It rebranded as Tether in November 2014 and released the USDT whitepaper. In February 2015, Tether launched USDT globally on the cryptocurrency exchanges Bitfinex and Poloniex, with its operations effectively based in Hong Kong. Since then, USDT has expanded to more trading platforms, supporting global, round-the-clock trading and settlement. It has now been in operation for over a decade.

Although Tether claims that USDT is fully backed by dollar-denominated assets on a one-to-one basis, it adheres to a decentralised model with insufficient external auditing and regulation. As a result, it’s unclear whether the reserves are adequate, have been misused, or whether USDT has been overissued through lending practices. Moreover, USDT’s market price as a crypto asset is not always equal to one U.S. dollar and fluctuates slightly.

Building on the foundation laid by USDT, in 2018, U.S. fintech company Circle partnered with the crypto exchange Coinbase to launch a new dollar-backed stablecoin, USDC. Their goal was to provide the market with a transparent and compliant USD-backed stablecoin in response to widespread industry concerns about USDT’s lack of reserve transparency.

This type of stablecoin, pegged to a fiat currency, is collectively known as a fiat-backed stablecoin. Although often still labelled a “cryptocurrency,” it has evolved its own distinct characteristics. Fiat-backed stablecoins are essentially digital tokens anchored to a fiat currency. Their “stability” refers specifically to price stability relative to the pegged currency. Unlike crypto assets such as Bitcoin, stablecoins exhibit genuine monetary attributes, similar to paper currency under the gold standard.

At the same time, the operational model of stablecoins differs from traditional fiat payment and settlement systems. They bypass banks and SWIFT entirely and operate over the public internet, enabling a global, 24/7 payment and settlement infrastructure. This model has given rise to entirely new forms of economic activity and payment use cases, positioning stablecoins as a foundational component of Web3.0 and decentralised finance (DeFi).

The emergence and development of USD-backed stablecoins have accelerated the growth of crypto asset trading and significantly expanded their societal influence. They have also catalysed the development of tokenised and fractionalised transactions involving both digital and real-world assets, such as NFTs and real-world assets (RWAs), as well as decentralised finance (DeFi). In addition, stablecoins are widely used for cross-border remittances and are increasingly permeating traditional financial systems.

This, in turn, accelerates the expansion of USD-backed stablecoins, with new variants continuously emerging and their use cases steadily broadening. This growth increases demand for U.S. dollars and U.S. Treasury bonds (as reserve assets), drawing in traditional financial institutions, including banks, card networks, and exchanges, alongside emerging internet payment platforms and major technology firms. The momentum was especially boosted after U.S. President Donald Trump publicly endorsed the development of crypto assets in 2024. This has also prompted other countries and regions to pay closer attention to fiat-backed stablecoins and explore their potential.

There has always been intense global debate about the nature of crypto assets and stablecoins, whether they need regulation, and the most appropriate regulatory approach. However, there is growing consensus among governments and the public that a lack of regulation poses a significant danger. While innovation should be encouraged, appropriate regulation is necessary to maximise benefits and minimise risks, especially to prevent serious harm to sovereign currencies and the financial system.

New changes following the regulation of fiat-backed stablecoins

On May 19, the U.S. Senate voted to advance the Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025, or GENIUS Act (pending further legal procedures before taking effect). On May 21, the Hong Kong Legislative Council passed the Stablecoins Bill in its third reading, which was signed into law by the Chief Executive on May 30. These developments are accelerating the global legislative momentum surrounding fiat-backed stablecoins. The integration of stablecoins into formal regulatory frameworks has become a global trend, contributing to a sharp rebound in crypto asset prices. On May 21, Bitcoin surged to a record high of USD 110,797 per coin.

The integration of fiat-backed stablecoins into regulatory frameworks will bring profound changes:

Most critically, regulation will prevent overissuance of stablecoins. Stablecoins must be fully backed by fiat currency reserves (which in turn reduces fiat liquidity). These reserves must be held in custody by independent institutions. Under-reserving, misappropriation, or the use of reserves as collateral is strictly prohibited. Regular audits are mandatory, and reserve disclosures must be made at least monthly. Moreover, stablecoins can only be issued through fiat redemption—issuers are not allowed to extend credit or offer interest-like returns to holders. These regulatory safeguards are designed to maintain a strict 1:1 peg with fiat currencies, thereby preventing overissuance and safeguarding the primacy of sovereign monetary systems.

This shift will significantly reorient the role of stablecoins from instruments focused on investment returns to tools primarily used for payments and settlement. Regulated fiat-backed stablecoins must operate under a license and within a centralised framework (subject to unified state supervision). As a result, they can no longer function as decentralised or self-governed systems. This transition poses substantial regulatory challenges for offshore-registered stablecoins like USDT, which may be compelled to promptly relocate their registration within the United States to remain compliant. In the long term, fiat-backed stablecoins could even be supplanted by unified central bank digital currencies (CBDCs), making them a transitional product in the ongoing evolution of the global monetary system.

In this light, the regulation of fiat-backed stablecoins does not represent the victory of decentralised currencies or decentralised finance (DeFi), but rather the triumph of sovereign authority and the emergence of new monetary technologies and operational models for payment and settlement. As more countries move to regulate fiat-backed stablecoins, global competition in this space is set to intensify. This calls for strengthened oversight not only of fiat-backed stablecoins but also of cryptocurrency trading platforms. Enhanced international cooperation is essential for the development and implementation of global regulatory standards.

Currently, U.S. dollar-backed stablecoins dominate the fiat-backed stablecoin landscape, with their market value growing rapidly. As of the end of April 2025, the total market cap of USD-backed stablecoins surpassed USD 240 billion, accounting for more than 99% of global fiat-backed stablecoins. In 2024, the total settlement volume through stablecoins exceeded USD 27.6 trillion, surpassing that of card networks like Visa and Mastercard. In 2025, the growth has further accelerated, pushing economic activity and payment and settlement systems toward distributed ledger-based infrastructure.

Through legislative measures, the United States has actively supported and protected crypto mining and trading, even recognising crypto assets as part of its national strategic reserves. It has legalised the operation of USD-backed stablecoins and is proactively positioning itself to lead in the fields of cryptocurrency and stablecoins—fields that may evolve into globally significant domains, potentially supplanting oil in strategic significance. This strategy also serves to bolster demand for U.S. Treasuries and to reinforce the global dominance of the U.S. dollar.

(Hong Kong’s legislation on fiat-backed stablecoins covers those pegged to currencies such as the HKD or USD. Given that the Hong Kong dollar is itself pegged to the U.S. dollar, issuing HKD stablecoins effectively strengthens the dollar’s international role.)

These developments warrant serious attention and a proactive response from other countries, particularly China.

Reflections triggered by fiat-backed stablecoin development

First, since USD-backed stablecoins can achieve global 24/7 online operation, why hasn’t the U.S. dollar itself been digitised to achieve the same functionality? At present, dollar stablecoins are expanding rapidly, with new variants emerging beyond USDT and USDC. Although these stablecoins are functionally similar, they operate independently, differ in valuation, and compete with one another, posing significant regulatory challenges for both the U.S. dollar and the stablecoin ecosystem. This raises important questions: Why are there so many dollar-backed stablecoins? Could a unified digital dollar eventually replace them?

Regardless, the rise of fiat-backed stablecoins highlights the need to reconceptualise the nature of money. Money should not be equated with its physical forms—whether shells, coins, or banknotes—nor should it be conflated with cash. While the essence of money remains constant—otherwise, it would cease to be money—its forms and mechanisms can, and indeed should, evolve. Such evolution aims to enhance efficiency, reduce costs, improve risk management, better fulfil money’s core roles, facilitate transactions, and support economic and social development.

As a unit of account, a store of value, and a medium of exchange, money will inevitably evolve to become more intangible, digitised, and intelligent. Physical cash—banknotes and coins—will, like shells and minted metal before them, ultimately exit the stage of monetary history. In the future, money will exist solely as strings of code or digital tokens representing smart accounts or wallets. These will incorporate elements such as cryptographic keys (public and private), verified user identities (in compliance with KYC and other regulatory requirements), account balances, and smart contracts.

Encryption will no longer be applied to the currency itself, but rather to the account and the entire transaction process. As long as security is maintained, payments and settlements will no longer depend on dedicated communication lines or local area networks. Instead, they will operate 24/7 over the global public internet, enabling broad, decentralised interconnectivity. This shift will significantly enhance efficiency while reducing operational costs.