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Risks and Regulation of Stablecoins: Challenges to Monetary Sovereignty and Financial Policy
With the development of Crypto Assets and cryptocurrencies, stablecoins have further evolved as pricing and trading tools for Crypto Assets in transactions. As a Token of fiat, stablecoins possess characteristics of quasi-currency, serving as the infrastructure of crypto finance and bridging the gap between crypto finance and TradFi. Without stablecoins, these two types of finance would develop in isolation from each other; crypto finance would not have an impact on the real economy, and cryptocurrencies would primarily serve as speculative tools, whereas stablecoins can connect these two markets. Stablecoins, as a bridge, broaden the scope of crypto finance usage, but they may also push the risks of crypto finance onto the traditional financial system. Conversely, the risks generated by the traditional financial system can also affect the crypto finance space.
The application of stablecoins originates from the demand for Crypto Assets trading, but with the introduction of stablecoins, it has begun to enter more into the physical space of cross-border payments, and in the future, it may also see more applications in retail, B2B, and other supply chain finance. It has started to transition from on-chain payments to off-chain, and its importance is becoming increasingly prominent. Furthermore, as more off-chain assets are brought on-chain, referred to as RWA, the demand for stablecoins as payment and trading tools in on-chain transactions will also increase. Therefore, we must consider the impact and risks that stablecoins bring to the financial system.
stablecoin and the banking system
Although stablecoins are tokens of existing currencies, in some countries with lower levels of financial development or high inflation, the public has widely used stablecoins as a payment tool in commercial activities. At the same time, stablecoins also serve as a measure of value and a store of value, effectively becoming currency. With the increase of stablecoin applications off-chain, especially in the gradual application of cross-border payments, the monetary function of stablecoins has become increasingly significant. This trend poses a certain impact on the payment systems of traditional banks.
Stablecoins may also have structural effects on banks, prompting deposits to shift from small to large deposits and concentrating them from small banks to large banks. In this process, although the total amount of deposits remains unchanged, the structure of deposits changes. Large banks will gain more large deposits and business opportunities, while small and medium-sized banks may be at a disadvantage in competition. This change not only affects the business models of banks but may also have profound implications for the stability of financial markets.
The relationship between stablecoins and central bank digital currencies.
Stablecoins and central bank digital currencies (CBDCs) are not necessarily in a competitive relationship; rather, they may have a division of labor and synergistic effects. For instance, transactions by state-owned enterprises and large corporations may rely more on the more secure central bank digital currency system, while many small and medium-sized enterprises and individuals tend to prefer using market-issued stablecoins, as they have higher demands for transaction speed and convenience. This division of labor allows stablecoins and CBDCs to complement each other. Furthermore, they can have a coordinating role. For example, requiring stablecoin issuers to hold central bank digital currency (CBDC) as reserves, directly linking it to the central bank's digital currency rather than simply relying on short-term government bonds.
In economies with high inflation and low levels of financial development, dollar stablecoins may replace local currencies, leading to a phenomenon known as dollarization. This is beneficial for the international status of the dollar and increases dollar hegemony, but the risks for the United States are also significant. If the United States were to issue the dollar on-chain globally, it would be akin to the development of offshore dollars in the past. Currently, the scale of offshore dollars is very large, posing certain challenges to the Federal Reserve's control over the total money supply and interest rates. In the future, the on-chain dollar could also be substantial, similar to the massive offshore dollar, and dollar stablecoins will influence the decision-making of U.S. monetary authorities.
stablecoin and macroeconomic policy
With the diversification of stablecoin issuers, fintech companies are gradually becoming important participants in currency issuance. This trend has both positive aspects and new risks. If the issuance basis of stablecoins is the government bonds held by fintech companies, the currency issuance rights may shift to some extent from the central bank to the Ministry of Finance, thereby weakening the power of the central bank.
The issuance of stablecoins impacts monetary and fiscal policies. With the issuance of stablecoins and the development of on-chain finance, it may squeeze the intermediary function of banks, affecting the transmission mechanism of monetary policy, similar to the role of shadow banking. The reserve asset requirements of stablecoins increase the demand for short-term government bonds, affecting the central bank's control over short-term interest rates, and will also change the maturity structure of government bonds, leading to the issue of short-term debt and long-term investment by the government.
stablecoin and the internationalization of the renminbi
The internationalization of the RMB cannot achieve a significant breakthrough through RMB stablecoins; it ultimately still relies on the opening of capital accounts and the full convertibility of the currency. The opening of capital accounts is the "Dao," while stablecoins are merely the "Shu"; one cannot solve the problem of the "Dao" through "Shu."
However, with the increase of Renminbi stablecoins, the demand for offshore Renminbi assets will rise significantly, driving the development of the offshore Renminbi market. When the scale of the offshore Renminbi market reaches a certain level, a gap will form between the onshore Renminbi interest rates and exchange rates and the offshore Renminbi interest rates and exchange rates, triggering large-scale cross-border capital arbitrage, which may impact capital account controls and thus prompt the mainland to accelerate the opening of capital accounts.
Conclusion
Stablecoins, as an emerging financial infrastructure, play an important role in improving payment efficiency and connecting on-chain encryption finance with TradFi, but they also bring new risks and challenges. We must pay close attention to the risks of stablecoins, fully utilize digital technology to strengthen the regulation of stablecoin issuance and trading, and promote the development of offshore RMB stablecoins. Only in this way can we enjoy the convenience and efficiency brought by stablecoins while effectively preventing the financial risks they may cause, ensuring the stability and healthy development of the financial system.