China Considers Yuan-Backed Stablecoins: A Challenge to USD?
Yuan-Backed Stablecoins: China's Response to Dollar Dominance
China is reportedly considering approving yuan-backed stablecoins in a move to increase the international usage of its currency. This decision comes amid growing concerns about the dominance of US dollar-backed stablecoins in the global market.
Key Takeaways:
- China is exploring yuan-backed stablecoins to promote its currency on a global scale.
- Currently, stablecoins backed by the US dollar hold over 99% of the market share.
Sources familiar with the matter indicate that the State Council is expected to review a comprehensive plan this month. This roadmap will likely include adoption targets, regulatory responsibilities, and risk management protocols.
Senior officials are also scheduled to discuss yuan internationalization and stablecoins, with the aim of establishing guidelines for their application in business operations. Further, the matter is slated for discussion at the Shanghai Cooperation Organization summit in Tianjin, with the objective of encouraging broader yuan adoption and stablecoin-based settlement in international trade.
The Pressure of Dollar-Pegged Stablecoins
While Beijing has maintained a strict stance against crypto activities since 2021, the expanding international acceptance of stablecoins may be influencing a reevaluation of its policies. The US's proactive steps toward institutionalizing bank-issued, dollar-backed stablecoins is another factor. The GENIUS Act aims to ensure credible one-to-one pegs backed by reserves and potential Federal Reserve support.
Standard Chartered has projected that the market capitalization of US dollar-backed stablecoins could reach $2 trillion by 2028.
There is a perception in Beijing that dollar stablecoins could present a risk, combining global liquidity with blockchain's speed and programmability, bypassing capital controls vital to Chinese financial management. The adoption of dollar stablecoins could potentially lower transaction costs for businesses, gradually diminishing the yuan's role in trade and payments.
Recent data indicates that the yuan's share in global payments decreased to 2.88% in June, marking a two-year low. In contrast, the US dollar accounted for nearly 47% of global payments, according to SWIFT data.
China's existing digital currency, the e-CNY, is facing adoption challenges, struggling to compete with established payment platforms like Alipay and WeChat Pay.
From Beijing's perspective, stablecoins—pegged to fiat currencies and leveraging blockchain technology—could serve as a mechanism to facilitate cross-border trade settlement and decrease dependence on the US dollar.