Former central bank governor Zhou Xiaochuan: Multi-dimensional review of stablecoins

# A Multidimensional Perspective on Stablecoins  

By Zhou Xiaochuan, Former Governor of the People's Bank of China  

Source: China Finance 40 Forum (CF40)  

Note: This article is compiled from parts of the speech delivered by Zhou Xiaochuan, former Governor of the People's Bank of China, at the CF40 Biweekly Closed-door Seminar "Opportunities and Prospects of RMB Internationalization" on July 13, 2025. Its core content is adapted, with minor adjustments, from his speech at the Annual General Meeting of the International Capital Market Association (ICMA) in Frankfurt on June 5, 2025.  

Currently, certain discussions on stablecoins only adopt a single perspective. To analyze the operation and future prospects of stablecoins, a multidimensional and multi-perspective examination is essential. If we aim to promote the development of digital payment systems and ensure their healthy growth, we must also pay attention to the performance and balance across multiple dimensions.  

## I. Central Bank Perspective: Preventing Excessive Money Issuance and Leverage Amplification  

Stablecoin issuers tend to seek the maximum scale of stablecoin issuance and adoption while minimizing their own costs. They may ask: "Why can central banks print money—can’t we do the same?" Today, they can essentially "print money" through stablecoins. However, due to a lack of in-depth understanding and sense of responsibility regarding monetary policy, macroeconomic regulation, and public infrastructure functions, they may lack sufficient self-discipline, potentially leading to uncontrolled issuance, high leverage, and instability. A stablecoin’s "stability" is not self-proclaimed; it requires a verification mechanism.  

Central banks currently have at least two major concerns about stablecoins. First is "excessive money issuance," where issuers release stablecoins without 100% backing by real reserves (i.e., over-issuance). Second is "leverage amplification," where the post-issuance operation of stablecoins generates a multiplier effect of monetary creation. While the U.S. *GENIUS Act* and Hong Kong’s *Stablecoin Ordinance* have addressed these issues, their regulatory oversight remains clearly insufficient.  

### 1. Clarify the Custodian of Issuance Reserves  

In practice, there have been numerous cases of custodians failing to fulfill their duties. In 2019, Facebook initially planned to self-custody the reserve assets for Libra, which would have given it high autonomy and allowed it to retain returns from the custodied assets. However, reserve custody must be reliable—it should be handled by a central bank or a custodian recognized and supervised by a central bank; otherwise, it cannot be trusted.  

### 2. Measure and Manage the Amplification Effect in Stablecoin Operations  

Even if an issuer holds 100% reserves, stablecoins may still generate a multiplier effect in subsequent operational links (e.g., deposits and loans, collateralized financing, trading, and revaluation). The potential run-off volume to address could be several times the size of the issuance reserves. While existing regulations seem to prohibit such amplification, a deeper understanding of the laws governing monetary issuance and operation reveals that current rules are far from sufficient to tackle monetary creation and amplification.  

We can draw lessons from the Hong Kong dollar banknote issuance mechanism by three commercial institutions: For every HK$7.8 issued, the three note-issuing banks must deposit US$1 with the Hong Kong Monetary Authority (HKMA) as reserves and receive a Certificate of Indebtedness. Based on HK$ M0 (physical currency in circulation), the economic and financial system generates M1 and M2 through monetary creation and multiplier effects. In the event of a run, pressure will target not only M0 but also M1 or M2. Even if the base money (M0) has 100% reserve backing, M0 reserves alone cannot address runs or maintain monetary stability.  

Stablecoins have three identifiable channels for amplification:  

- Deposit-loan channels;  

- Collateralized financing channels;  

- Asset market trading channels (allowing additional purchases or revaluation of reserve assets).  

Regulators must therefore track and calculate the actual circulation of issued stablecoins; otherwise, it will be impossible to determine the potential scale of redemption risks. The multiplier effect of stablecoins also creates opportunities for fraud and market manipulation.  

## II. Financial Service Model Perspective: The Actual Demand for Decentralization and Tokenization  

If future ecosystems involve large-scale decentralization of financial activities and widespread tokenization of assets and trading instruments, stablecoins will be highly useful—first, they can support the development of decentralized finance (DeFi), and second, tokenization is a necessary foundation for DeFi operations. However, we need to ask: Why, or to what extent, will we move toward decentralization and tokenization?  

From the supply side, blockchain and distributed ledger technology (DLT) do offer unique features for decentralized operations. But from the demand side: How much demand is there for decentralization as a new operational system? Will most financial services shift to this new system?  

A rational assessment shows that not many financial services are suitable for decentralization, and even fewer can achieve significant efficiency gains through decentralization. We also need to calmly evaluate the actual demand for tokenization as a technical foundation.  

Looking at the much-anticipated upgrade of payment systems (especially cross-border payments), China and several Asian countries have achieved success in retail payment systems based on mobile phones, with QR codes and near-field communication (NFC) as merchant interfaces—yet these systems remain account-based. Currently, China’s central bank digital currency (CBDC) is also account-based, serving as an extension and upgrade of the existing financial system. Additionally, some Asian countries have implemented direct cross-border connectivity of fast payment systems, without choosing the path of decentralization or tokenization.  

To date, centrally managed account systems have demonstrated strong adaptability. The argument for replacing account-based payment systems with full-scale tokenization lacks sufficient basis.  

The Bank for International Settlements (BIS) has proposed a centralized ledger architecture—the "Unified Ledger"—which tokenizes bank deposits and many other financial services. Within this centralized framework, CBDCs can play a key role, representing a combination of centralization and tokenization. However, we must question: Not all financial assets are suitable for tokenization, nor are all links in financial services suitable for decentralization. A detailed, item-by-item analysis and comparison is required.  

## III. Payment System Perspective: Technical Paths and Compliance Challenges  

The upgrade of payment systems focuses on two core issues: payment efficiency and compliance.  

### 1. Payment Efficiency  

Enhanced payment efficiency is considered a potential advantage of stablecoins. In the current digitalization of payment systems, there are roughly two paths to improve efficiency:  

- **Path 1**: Continue with account-based systems and drive optimization and innovation based on IT and Internet technologies.  

- **Path 2**: Build a new payment system based on blockchain and cryptocurrencies.  

From the development of payment systems in China and Southeast Asia, most progress to date has been built on Internet and IT technologies—including the growth of third-party payment platforms, advances in CBDCs, NFC-based hardware wallets, and the interconnection of fast payment systems. These developments have significantly improved payment efficiency and convenience.  

### 2. Compliance  

Technical paths are not the sole criterion; comparisons of payment performance must also prioritize security and compliance—including requirements such as Know Your Customer (KYC), identity verification, account opening management, Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), anti-gambling, and anti-narcotics transactions. Some argue that since stablecoins are blockchain-based, they do not require account opening. This is inaccurate: Even with "software wallets," user identity verification and account opening procedures are necessary to meet compliance requirements. Currently, stablecoin payment services still have obvious shortcomings in KYC and compliance.  

## IV. Market Trading Perspective: Market Manipulation and Investor Protection  

From the perspective of financial and asset market trading, the top priority is to prevent market manipulation—especially price manipulation—which requires sufficient transparency and effective regulation. In fact, such manipulation already exists, with several relevant cases having occurred. Some of these price manipulation practices are clearly fraudulent. However, under the improved current regulatory frameworks (including the U.S. *GENIUS Act*, Hong Kong’s relevant ordinances, and Singapore’s regulatory rules), these issues remain inadequately addressed.  

A new phenomenon is the "mixed use of multiple coins," where multiple currencies are used simultaneously for transactions or payments in a single system. Not all of these currencies are truly stablecoins, and there may be no consistent, widely recognized standards for stablecoins. In current asset markets—especially virtual asset exchanges—many trading instruments can be settled with stablecoins, non-stable cryptocurrencies, or even highly volatile coins. This arrangement creates opportunities for market manipulation and has become a key focus of regulatory attention.  

Notably, some market promoters claim that stablecoins and Real-World Asset (RWA) technologies can split asset trading shares into extremely small units, enabling broader investor participation. They even assert that this model has attracted a large number of students under 18 to participate in trading.  

While some argue that this helps cultivate young people’s participation in capital markets and contributes to future market prosperity, its actual benefits remain unproven from the perspective of investor protection. In the past, emphasis has always been placed on investor suitability and qualification requirements. There is currently insufficient basis to determine whether minors are suitable for participating in asset market trading. If market manipulation cannot be effectively prevented, allowing unqualified investors to enter will significantly increase risks.  

## V. Micro-Behavior Perspective: Motives of Participants  

Stablecoin issuers are generally profit-driven commercial entities. Most participants in stablecoin-related payment and asset trading services are also commercial institutions, which inherently have commercial motives. However, stablecoins and payment systems include functions or links with infrastructure and inclusive finance attributes. These cannot be guided by the logic of maximizing corporate self-interest; instead, they should embody a spirit of public service. Clear boundaries must be drawn between areas suitable for market-oriented entities and those that belong to infrastructure.  

A micro-perspective is needed to analyze the motives and behavioral patterns of various participants in the stablecoin ecosystem:  

- What considerations drive users to pay with stablecoins?  

- Why are recipients willing to accept stablecoins?  

- What motives guide stablecoin issuers?  

- What trading scenarios do private exchanges pursue?  

- Hong Kong has issued licenses to 11 virtual asset trading platforms—what are the key trading entities and products these licensed institutions focus on, and how do they profit?  

While many believe stablecoins will reshape the payment system, the reality is that the existing payment system—especially in retail payments—has limited room for cost reduction. In China, the current retail payment system (including third-party payment platforms, CBDCs, hardware/software wallets, and clearing infrastructure) has not adopted decentralization or tokenization. After years of development, it is already highly efficient and low-cost, leaving little room for new entrants to reduce costs and make profits in this field.  

In the U.S., however, there may still be some room for cost reduction and profit in retail payments. This is because the U.S. has long relied on credit card payment systems, where merchants typically bear a 2% discount fee—creating an incentive to explore new, lower-cost payment systems. This shows that the circumstances of payers and recipients vary across countries and regions.  

Cross-border payments and remittances are often cited as key application scenarios for stablecoins. To explore this issue in depth, we first need to break down the reasons for high cross-border payment costs and identify which links drive these high fees.  

It is important to note that claims that traditional cross-border payment systems are "technically very expensive" may be exaggerated. In fact, many cost factors are non-technical—they are related to foreign exchange controls, which in turn involve institutional issues such as balance of payments, exchange rates, and monetary sovereignty. Another portion of costs comes from compliance requirements like KYC and AML, which cannot be avoided even with stablecoins. Additionally, some costs stem from the "rents" of cross-border foreign exchange business as a licensed operation. In short, the appeal of stablecoins in cross-border payments is not as great as imagined—except in scenarios where a country’s own currency has collapsed and dollarization is necessary.  

From the perspective of stablecoin issuers, if they find limited appeal in domestic and cross-border payments, they are most likely to focus on asset market trading—especially virtual asset trading. Some assets in these markets have strong speculative attributes and are prone to price inflation driven by speculation, which makes stablecoin issuance more attractive. Moreover, certain virtual assets can in turn serve as qualified or semi-qualified reserves for stablecoin issuance.  

Based on current micro-behaviors, we must remain vigilant about the risk of stablecoins being overused for asset speculation. A misalignment in this direction could lead to fraud and instability in the financial system.  

Additionally, it is worth noting that some players in the stablecoin industry use the popularity of stablecoins to inflate their companies’ valuations. Certain firms may use this to "raise funds" in capital markets or cash out after capital appreciation—while paying little attention to the stablecoin business itself, its profitability, or its sustainability. This is detrimental to the healthy development of the entire financial system and may accumulate systemic risks.  

## VI. Circulation Path Perspective: The Cycle from Issuance to Redemption  

The circulation path of stablecoins covers the entire cycle from issuance, to circulation in specific scenarios, to redemption.  

Take the banknote issuance of the People’s Bank of China as an example: Printed banknotes are first stored in designated issuance vaults. Whether and when these banknotes enter the market depends on commercial banks’ demand for physical currency. Commercial banks only withdraw cash from the central bank’s issuance vaults when their customers have net demand or a loan-deposit gap. After withdrawal, the banks incur holding costs—so they will return excess cash to the vaults when inventories are high. This shows that the circulation of money does not happen automatically.  

Similarly, a stablecoin issuer obtaining a license and depositing reserve funds does not equate to issuing stablecoins. Without sufficient demand scenarios, stablecoins may fail to enter effective circulation—meaning an issuer could hold a license but be unable to issue any stablecoins. Theoretically, circulation paths should be network-like, with several main channels carrying most of the volume. If the main channel for payments is blocked, stablecoins will overly rely on virtual asset speculation to enter circulation—raising concerns about their health.  

Furthermore, whether stablecoins are used as temporary payment media for transactions or as value storage tools for a certain period will affect their retention in the market after issuance. If users only hold stablecoins for transactions and minimize their holdings, the role of stablecoins will be weak and their issuance volume small. This relates to circulation paths, holding motives and behaviors, and supporting systems—and cannot be automatically granted by an issuance license.  

In conclusion, facing the new phenomenon of stablecoins, scholars, researchers, and practitioners must observe and analyze their functions and implementation paths from multiple dimensions. They should avoid using imprecise concepts, data, or one-sided thinking. Only by comprehensively evaluating key dimensions can we better guide the direction of the stablecoin market.  

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