Stablecoins have surged into the global financial spotlight, drawing attention from regulators, investors, and tech giants alike. With major developments like the U.S. Senate passing the Stablecoin Innovation and Technology Act, Hong Kong advancing its Stablecoin Ordinance Bill, and PBOC Governor Pan Gongsheng mentioning stablecoins for the first time at the Lujiazui Financial Forum, it's clear that this digital asset class is gaining institutional momentum.
Tech leaders such as Ant Group and JD.com are also stepping into the space, while financial analysts have published nearly a hundred research reports on stablecoin ecosystems in just one month.
But what exactly is a stablecoin? Why are governments and institutions racing to regulate and adopt them? And how do they fit into the future of finance?
Let’s break down six essential questions using plain language—perfect for beginners in the crypto world.
What Is a Stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a stable value, unlike volatile assets like Bitcoin or Ethereum.
The key to its stability lies in asset backing. Most stablecoins are pegged 1:1 to a reserve asset—typically a fiat currency like the U.S. dollar. For every unit of stablecoin issued, there should be one dollar held in reserve.
For example, Tether (USDT), the largest stablecoin by market cap, has over $150 billion in circulation—all theoretically backed by real-world assets. When you exchange $1 for 1 USDT, Tether uses that dollar to buy highly liquid instruments, primarily short-term U.S. Treasury bonds.
Tether doesn’t pay interest to users but earns yield from these investments—this spread becomes their primary revenue source.
When users want to cash out, they return the USDT, and Tether redeems the equivalent in dollars by selling part of its reserves. However, if demand remains high and users trade among themselves, the issuer may not need to constantly liquidate assets.
While stablecoins can technically be backed by commodities (like gold), other cryptocurrencies, or even algorithmic mechanisms, current regulations in places like the U.S. and Hong Kong only recognize fiat-backed stablecoins. Over 95% of all stablecoins today are tied to the U.S. dollar.
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What Are Stablecoins Used For?
1. Cross-Border Payments
Governor Pan Gongsheng highlighted stablecoins’ potential for “payment equals settlement” and drastically shortening cross-border payment chains.
Traditional international transfers rely on SWIFT and involve multiple intermediaries—correspondent banks, clearing systems across countries—each adding time and fees.
With stablecoins, payments happen directly on a blockchain network. The entire process—from sender to receiver—can settle in minutes, bypassing legacy infrastructure and reducing costs significantly.
This efficiency is especially valuable in regions with unstable currencies, underdeveloped banking systems, or high trade dependency.
2. Gateway to Digital Asset Trading
Bitcoin and other cryptocurrencies are known for price volatility—they’re better suited as investment vehicles than daily transaction tools.
Traders often convert fiat into stablecoins before buying or selling volatile digital assets. Because stablecoins mirror the dollar’s value and settle instantly, they act as a bridge between traditional finance and crypto markets.
In fact, more than 90% of Bitcoin trades are settled in USDT or USDC. Think of stablecoins as the universal trading currency of the digital economy—just like the U.S. dollar dominates global commodity markets.
Why Are Stablecoins Hard to Regulate?
Despite their benefits, regulating stablecoins poses two major challenges:
1. Decentralization and Anonymity
Stablecoins operate on decentralized blockchain networks, enabling peer-to-peer transactions without central intermediaries like banks. While this boosts efficiency, it reduces regulatory oversight points.
Additionally, blockchain transactions can be pseudonymous, making them attractive for illicit activities such as money laundering or tax evasion—raising red flags for compliance authorities.
2. Impact on Monetary Supply
Stablecoin issuers function similarly to shadow banks. They collect user funds and reinvest them—often into Treasury bonds—effectively creating new credit in the system.
This indirect money creation can interfere with central banks’ monetary policy control, especially if stablecoin adoption grows unchecked.
However, regulators still hold leverage: since stablecoins must convert to and from fiat currencies, these on-ramps and off-ramps serve as critical control points.
As a result, jurisdictions including the U.S., EU, UK, Singapore, and Hong Kong have begun integrating stablecoins into formal financial oversight frameworks.
Why Is the U.S. Pushing Stablecoins?
The United States sees stablecoins as strategic tools to reinforce two pillars of its economic power:
1. Preserve Dollar Dominance
Over 95% of stablecoins are pegged to the U.S. dollar. To use them, users must first acquire dollars—effectively expanding the dollar’s global footprint.
By promoting dollar-backed stablecoins, the U.S. extends its currency’s reach into emerging markets, unbanked populations, and crypto-native economies—strengthening dollar hegemony in the digital age.
2. Support the U.S. Debt Market
When users deposit dollars to mint stablecoins, issuers invest those funds—largely in short-term U.S. Treasuries. For instance, Tether allocates about 67% of its reserves to government debt.
The Stablecoin Innovation and Technology Act formalizes this linkage by encouraging regulatory clarity around reserve composition.
If stablecoin adoption scales up—from today’s $2 trillion to an estimated **$3.7 trillion by 2030**—stablecoin issuers could become major buyers of U.S. debt, helping finance the nation’s $36 trillion national debt.
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Why Is China Exploring Stablecoins?
China’s approach is more defensive than offensive.
Currently, RMB-backed stablecoins have minimal global presence. Users naturally prefer widely accepted currencies like the dollar for stability and liquidity.
Yet, with stablecoins becoming a global trend—potentially irreversible—China recognizes the need to participate strategically.
As noted by Li Yang, academician at the Chinese Academy of Social Sciences, China should pursue a dual-track strategy:
- Advance RMB internationalization by increasing acceptance abroad.
- Develop digital RMB (e-CNY) and explore regulated stablecoin frameworks domestically.
Digital Yuan vs. RMB Stablecoins: What’s the Difference?
Both exist digitally and improve transaction efficiency, but differ critically:
| Aspect | RMB Stablecoin | Digital Yuan (e-CNY) |
|---|---|---|
| Issuer | Private companies | Central Bank (PBOC) |
| Credit Backing | Corporate reserves | Full state guarantee |
| Monetary Impact | Can expand money supply via asset investment | No new money creation |
Only the central bank can issue digital yuan, ensuring full control over monetary policy. Stablecoins issued privately could indirectly increase liquidity if reserves are invested—posing regulatory concerns.
Who Are the Key Players in the Stablecoin Ecosystem?
Stablecoins aren’t just about issuers—they power an entire ecosystem across three layers:
🔹 Upstream: Technology Providers
Blockchain platforms (e.g., Ethereum, Solana), smart contract developers, audit firms ensuring transparency.
🔹 Midstream: Issuers
Companies like Tether (USDT), Circle (USDC), who issue and manage reserves.
🔹 Downstream: Application Platforms
Crypto exchanges (like OKX), DeFi protocols, payment gateways, cross-border remittance services leveraging stablecoins.
Indices now track this growing sector—not just issuers but tech enablers and use-case innovators.
Frequently Asked Questions (FAQ)
Q1: Can I buy stablecoins in mainland China?
No. Mainland Chinese residents currently cannot directly trade or issue stablecoins under existing regulations. Access through Hong Kong channels exists but requires strict compliance—typically limited to institutional investors.
Q2: Are all stablecoins backed 1:1 by cash?
Not necessarily. While reputable ones like USDT and USDC claim full backing, audits vary. Some reserves include commercial paper or Treasuries—not just cash. Always check reserve transparency reports.
Q3: Could stablecoins replace traditional banking?
Unlikely soon. They complement rather than replace banks—but they do challenge intermediaries in payments and capital markets.
Q4: Is holding stablecoins safe?
Generally yes—if using well-audited tokens. Risks include issuer insolvency, regulatory crackdowns, or de-pegging events during market stress (e.g., UST crash in 2022).
Q5: Will central banks ban private stablecoins?
Possibly in some jurisdictions. Many central banks prefer sovereign digital currencies (like e-CNY) but may license private stablecoins under tight rules—as seen in Hong Kong and EU’s MiCA framework.
Q6: Do stablecoins pay interest?
Not inherently—but many platforms offer yield through lending or staking mechanisms. Be cautious: higher returns often mean higher risk.