Beijing faces up to digital dilemma

Kandy Wong kandy.wong@scmp.com

South China Morning Post
Sep 05, 2025
Fears of relinquishing some control over the financial system must be balanced by risks that dollar-backed stablecoins will give US even more global clout

Once a niche corner of the cryptocurrency world, stablecoins have surged into the global spotlight this year, prompting analysts and industry insiders to declare that the digital asset’s time has come.

In July, United States President Donald Trump signed the Genius Act into law, establishing the first federal regulatory regime for stablecoins – a move many believe could pave the way for massmarket adoption.

Shortly after, the city introduced its own ordinance, which took effect on August 1, requiring issuers to be licensed by the Hong Kong Monetary Authority.

Wall Street has taken note. In August, analysts from leading investment bank Goldman Sachs dubbed the past few months the summer of stablecoins.

But for China, the rise of the digital asset underscores a long-standing dilemma. Despite turning Hong Kong into a testing ground, Beijing continues to restrict the unconventional digital asset, wary of the risks associated with cryptocurrency. At the same time, it faces a daunting prospect: the fear that stablecoins will further entrench the US dollar’s dominance in the international monetary system.

Unlike highly volatile cryptocurrencies like bitcoin or ethereum, stablecoins are pegged 1:1 to fiat currencies like the US or Hong Kong dollar, or to other reserve assets. Designed to live up to their name, they aim to combine the efficiency of digital assets with the reliability of traditional money – so long as the currency behind them remains strong.

But while stablecoins can, in principle, be pegged to any fiat currency, more than 99 per cent are backed by the US dollar or dollar-denominated assets – far outstripping the currency’s roughly 50 per cent share of global payments and 58 per cent share in global foreign exchange reserves.

Analysts said Washington’s push to regulate dollar-pegged cryptocurrencies might now compel Beijing to respond, albeit cautiously.

“A yuan-backed stablecoin would allow easier cross-border flows, but Beijing fears such instruments could undermine capital controls by facilitating capital flight,” said Dominic Chiu, senior analyst for China and Northeast Asia at Eurasia Group.

“The biggest challenge lies in China’s strict capital controls and tendency to avert financial risk,” he added, pointing to other concerns such as money laundering and illicit financing.

Matteo Giovannini, senior finance manager at the Industrial and Commercial Bank of China and a non-resident associate fellow at the Centre for China and Globalisation think tank in Beijing, said the government was “unlikely to suddenly embrace stablecoins across the board”.

Beijing’s biggest challenge lay in reconciling its desire to internationalise the yuan with its insistence on maintaining strict domestic capital controls, Giovannini said.

“A yuan-backed stablecoin, by design, would allow transactions to flow across borders with ease, weakening Beijing’s ability to police capital movements and combat money laundering.

“This runs directly counter to one of the core principles of China’s financial management.”

The e-CNY, China’s state-controlled digital currency, added “another layer of complexity”. Beijing had invested heavily in the digital yuan and feared that a yuan stablecoin would overlap with, or even compete against it, Giovannini said.

China banned cryptocurrency trading and mining in 2021 due to concerns over financial stability. In June, Pan Gongsheng, governor of the People’s Bank of China, told the Lujiazui Forum in Shanghai that new technologies such as stablecoins were thriving but “posed great challenges to financial regulation”.

“The very features that make a stablecoin effective are the ones the system is least willing to allow,” said Monique Taylor, a lecturer in world politics at the University of Helsinki.

“The policy problem is how to capture some of the network benefits of wider use without opening new channels for capital flight and illicit flows.”

A credible yuan-backed stablecoin would require deep and safe yuan-denominated reserves, transparent governance and secure redemption mechanisms – issues “that matter just as much as the legal framework”, Taylor added.

For Beijing, the stakes are high. In June, US Treasury Secretary Scott Bessent reportedly said the market for US dollar-linked stablecoins could reach US$2 trillion or even more. In a recent Bloomberg interview, he said “locking in dollar supremacy” was his top priority at the Treasury. And in July, he hailed stablecoins as “groundbreaking”, saying they could “buttress the dollar’s status as the global reserve currency”.

The currency’s role in remittances, fintech and decentralised financial transactions could be strengthened if dollar-backed stablecoins gained traction internationally, said Chiu at Eurasia Group. For China, “this is a strategic concern: a delayed entry risks making US dollar stablecoins the ‘default’ in the digital asset economy”.

As Washington seeks to reinforce dollar dominance, Reuters reported last month that the State Council would “review and possibly approve a road map” in late August to expand the yuan’s global usage – though no announcement had been made at the time of publication.

Raymond Yeung, chief economist for Greater China at Australia’s ANZ Bank, also suggested in late August that Beijing would “likely launch more measures to promote [the] international use of the yuan against the global backdrop of de-dollarisation”.

“Yuan-backed stablecoins will act as an alternative form of offshore yuan,” he said.

“The application of blockchain technology is effectively tokenising a portfolio of onshore CNY instruments, notably the CGB [China Government Bonds].”

While the Genius Act might bolster the US dollar’s position by requiring that stablecoins be fully backed by high-quality liquid assets, including short-term Treasury bills, Yeung noted that a yuan-backed stablecoin could play a similar role for Chinese government bonds.

But according to Taylor at the University of Helsinki, the US enjoyed a “first-mover advantage” by establishing digital payment infrastructure for stablecoins, which had “widened the asymmetry” in network effects and monetary influence. China had yet to launch a comparable instrument, she noted, which could incentivise Beijing to respond.

In a June article in domestic media outlet 21st Century Business Herald, Yang Tao, deputy director of the National Institution for Finance and Development, also called for a yuan-backed stablecoin.

“China should prioritise stablecoin-related legislation, while also preparing to establish a comprehensive regulatory framework for cryptocurrencies over the medium to long term, establishing China’s ‘long-arm jurisdiction’ in Web3 [decentralised] finance in a tiered and phased manner,” he said.

“One viable path forward is to pilot the issuance and management of onshore yuan-backed stablecoins in the Shanghai freetrade zone, with the support of a specific regulatory framework and a selective group of banks or nonbank payment institutions.”

Some of China’s neighbours have already opened the door to crypto assets. Katsunobu Kato, Japan’s finance minister, said at a Tokyo forum on August 25 that cryptocurrency “could be part of diversified investments”, provided volatility risks were mitigated. Japan’s Financial Services Agency was expected to approve the first yen-denominated stablecoin this autumn, media outlet Nikkei reported.

South Korea is also establishing a won-based stablecoin market. The country’s cryptocurrency exchange, Upbit, was collaborating with payments company Naver Pay to promote the initiative, according to a report by the Korean media outlet KBS in July.

In the US, Trump’s ambition to position his country as “the world’s market for crypto capital could potentially transform America’s digital asset ecosystem”, according to an HSBC report released in July.

“Stablecoins, linked to fiat currencies, are likely to be a key means for institutional and corporate investors to transact in the digital space,” the authors said, noting that “USD-pegged stablecoins account for 99 per cent of the overall market capitalisation for stablecoins.”

For China, the likeliest path to developing its own stablecoins would be “a limited offshore approach”, with Hong Kong or designated free trade zones authorised to experiment with yuan-backed tokens, while the mainland remained off-limits, Giovannini at ICBC said.

Such an approach would align with Beijing’s goal to “consolidate and upgrade the status of Hong Kong as an international financial centre”, according to Yang at the National Institution for Finance and Development – a priority highlighted in the Central Financial Work Conference in November 2023.

There was “low but growing potential” for Beijing to open up to stablecoins, though only “gradually and in tightly controlled test zones” such as Hong Kong, said Chiu at Eurasia Group. That would “probably not mean liberalisation for retail use in mainland China” but “limited, regulated pilots with state oversight, at least in the immediate term”, he added.

Taylor at the University of Helsinki agreed, saying Beijing was “signalling a selective opening”.

“Through Hong Kong’s new licensing framework, authorities are permitting yuan-linked stablecoin projects under tightly regulated conditions, including strict know-your-customer (KYC) and anti-money-laundering (AML) requirements.”

These “safeguards reflect Beijing’s preference” for strict oversight, Taylor said, even as industry participants warned that stringent identity checks might discourage usage and limit uptake in the early stages.

“I do not expect a reversal of the mainland ban on crypto trading. Any yuan-backed stablecoin would be framed as regulated financial market infrastructure rather than a retail crypto product,” she added.

Former central bank governor Zhou Xiaochuan also weighed in. In an article published in August, Zhou called for a “multidimensional assessment” of the digital asset, including the benefits and systemic risks it might pose.

He urged a “careful assessment of the true demand of tokenisation as a technological foundation”, arguing that centrally managed, account-based systems had proven highly effective, with insufficient evidence that fully tokenised solutions should replace them.

He also noted regional differences, contrasting China’s highly efficient and low-cost retail payment system – in which digital payments play a significant part – with the American system, which had long relied on credit cards and might still have room to reduce costs.

“Although many believe stablecoins will reshape the payments system, in reality, there is little room to cut costs in the current system, particularly in retail payments,” he said.

But analysts said yuan-backed stablecoins could promote the currency’s internationalisation through direct settlements with trade partners like Russia as well as countries in the Middle East and Southeast Asia – if Beijing were to relax its stance “more significantly”.

“It could also support more efficient cross-border transactions: stablecoins provide realtime settlement, improving efficiency for import/export payment flows,” Chiu from Eurasia Group noted.

Yuan stablecoins would not dethrone the dollar, according to Chiu, but could help Beijing reduce its exposure to US sanctions and American-dominated transaction systems.

On a geopolitical level, a “well-designed” yuan stablecoin could serve as an alternative to dollar-backed digital assets, Giovannini said, “helping Beijing push for a more multipolar financial system” in which the yuan played a larger role.

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