Wang Yongli: The profound impact of US stablecoin legislation exceeds expectations.

Author: Wang Yongli, Source: China Economic Times

At the urging of U.S. President Trump, the “Guidance and Establishment of the U.S. Stablecoin National Innovation Act” (referred to as the “U.S. Stablecoin Act”) was signed by the President on July 18 and took effect immediately, just before the Hong Kong “Stablecoin Regulation” came into effect on August 1. This has sparked significant global attention and discussion, with many interpreting it as a new manifestation of the intense competition for global monetary power, which will drive more countries and regions to accelerate their own fiat stablecoin legislation. New stablecoins will emerge in large numbers and expand massively, reconstructing the international monetary system and the rules of the financial market.

Fiat stablecoins pegged to fiat currencies were first introduced in early 2015 by the American company Tether with the US dollar stablecoin “USDT,” which has now been operating for over 10 years and has spurred the accelerated development of new US dollar stablecoins like “USDC” and other stablecoins. By June 2025, the market value of US dollar stablecoins is expected to exceed $250 billion, accounting for more than 95% of the total market value of stablecoins. However, the legislative regulation of stablecoins has only just begun, with relevant bills being rushed out, and there are still areas that need improvement and modification, especially in the understanding of stablecoins and crypto assets. It is necessary to break through existing cognitive constraints and observe and grasp these concepts with a broader perspective and greater dimension.

The most prominent feature of stablecoins is “on-chain cryptocurrency”

Fiat-backed stablecoins are assets reserved in a specified range of a certain fiat currency, maintaining a stable ratio with that fiat currency, but need to be converted into a cryptocurrency that can be used in a borderless global blockchain system. Unlike general non-cash digital currencies (including currencies saved in deposit accounts or electronic wallets), stablecoins belong to a special category of “on-chain cryptocurrencies.”

On-chain cryptocurrencies are no longer tangible paper bills and coins; they are merely a string of characters that represent the owner’s on-chain registration address as well as the account address of their currency on the chain (registration is equivalent to opening an account). Hidden behind this are various elements such as the owner’s identity information, private keys, account balances, and smart contracts. Blockchain platforms need to employ distributed ledger technology to encrypt and protect the entire process of account operation, ensuring that it is real, transparent, and secure, which significantly differentiates it from the manifestation and operation modes of traditional fiat currencies. Therefore, discussing stablecoins without considering blockchain is unrealistic and deviates from the fundamentals.

The most fundamental application scenario of stablecoins is the “on-chain crypto world”

At the beginning of 2009, the on-chain native cryptocurrency “Bitcoin” and its blockchain, created through the high integration of blockchain and cryptographic technology, officially debuted. This was followed by the emergence of the Ethereum blockchain and its native cryptocurrency “Ether”, which in turn spurred the creation of more various on-chain derivative cryptocurrencies (commonly known as “altcoins”) that raised Bitcoin or Ether through new coin offerings (ICOs) and traded on the blockchain. Additionally, cryptocurrency trading platforms were established to provide services for the issuance, trading, and exchange of these cryptocurrencies, enabling 24/7 uninterrupted global trading on the blockchain, forming a borderless and decentralized “on-chain crypto world” and accelerating its development. The “on-chain crypto world” has become one of the most important innovative achievements of humanity’s use of blockchain and cryptographic technology in the 21st century, which will have a profound impact on the human world and must receive high attention.

However, developing and operating a blockchain and its output and trading of cryptocurrency assets require a significant investment of off-chain costs (fiat currency). If one can only earn income from cryptocurrency assets like Bitcoin but cannot easily convert them into fiat currency, it will far from meet the demands of cryptocurrency asset development. At the same time, without the ability to attract fiat currency investments in cryptocurrency assets, the value of cryptocurrency assets is also difficult to realize effectively. Specifically, for blockchain-generated cryptocurrency assets like Bitcoin, the exchange rate against fiat currencies like the US dollar often experiences severe fluctuations, making it very difficult to directly use Bitcoin as currency to exchange for necessities in the off-chain world. These factors have given rise to a unique fiat stablecoin that connects off-chain fiat currency with blockchain-generated cryptocurrency assets. As a result, the “on-chain crypto world” has become the fundamental source of demand and application scenarios for fiat stablecoins.

Fiat-backed stablecoins strongly promote the development of the on-chain crypto world

Blockchain and encryption technology are highly integrated. Although they have given rise to native and derivative encrypted assets on the chain, such as Bitcoin, and even led to the emergence of non-fungible digital twin encrypted assets like “NFTs”, without sufficient participation from fiat currencies, these encrypted assets are mainly confined to the on-chain encrypted world, making it difficult to fully demonstrate their value and have a significant impact on the off-chain real world. The emergence of fiat stablecoins has become a value channel connecting the encrypted world and the real world, able to meet the demands for 7×24 hour uninterrupted trading and payment settlement of encrypted assets on the chain, strongly supporting the development of the encrypted world. Moreover, as real-world assets, fiat stablecoins have pioneered and set successful examples for the on-chaining of real-world assets (RWA), leading to the emergence of more RWA products.

However, due to the emphasis on decentralization and deregulation of stablecoins, they have not received legal recognition and regulatory protection. Serious issues have indeed arisen during their development, resulting in banks and other financial institutions being unable to participate proactively, which has greatly hindered the development of stablecoins and the crypto world. Now, the legislative implementation of fiat stablecoins and even the entire crypto asset class has established the legality of fiat stablecoins and crypto assets, which will undoubtedly encourage significant participation from banks and other financial institutions. This will also lead to various standardized financial assets being brought onto the blockchain for trading in a Real World Asset (RWA) manner, accelerating the development of the on-chain crypto world into an irreversible trend—this should be the most significant contribution of U.S. stablecoin legislation.

Fiat-backed stablecoins not only meet the development needs of the crypto world but also accelerate its growth, with both aspects complementing and promoting each other. If one does not consider stablecoins within the broader context of the blockchain world but limits the understanding to the realm of monetary finance, it is difficult to fully grasp and appreciate the concept of stablecoins.

Cryptographic assets cannot become the true currency of the cryptographic world

Bitcoin, Ethereum, and other native and derivative on-chain crypto assets, although often referred to as “coins” (called “cryptocurrencies” or “digital currencies”), have proven in practice that they cannot become true currencies, but can only be a new type of crypto (digital) asset. It is precisely for this reason that the emergence and support of fiat stablecoins are necessary.

Currency has a history of thousands of years in human society, with its forms (or carriers) and modes of operation continuously improving. It has evolved from the initial natural commodity money (such as shell money) to standardized metal coins (such as copper coins, gold coins, and silver coins), then to metallic-backed paper currency, and further to pure fiat currency that detaches from any specific commodity value, allowing the total money supply to vary in accordance with changes in the total value of tradable wealth (moving from tangible to intangible, highlighting its essence). This evolution has continually improved efficiency, reduced costs, and strengthened control measures to better fulfill its functional role.

The development and changes of currency are determined by its fundamental connotation: the essential attribute of currency is a measure of value (divisible and accumulable), its core function is as a medium of exchange (a tool for value transfer and settlement), and its fundamental manifestation is as a value token (a transferable claim to value) with the strongest liquidity (requiring the highest credit support within the circulation range). These three aspects are essential core elements that fully describe currency.

As a measure of value, the most fundamental requirement of currency is its singularity and basic stability in value. This necessitates that the total amount of currency must change in accordance with the changes in the total value of tradable wealth, possessing adjustability and flexibility, ensuring the basic stability of currency value based on sufficient supply. Therefore, any tangible items that originally acted as currency, such as shells, bronze, gold, silver, etc., must withdraw from the currency stage and return to their original state as tradable wealth since their supply cannot keep up with the infinite growth of the value of tradable wealth. Furthermore, implementing a gold standard or seeking one or several specific items (such as rare earths) with limited supply as currency or currency benchmarks is fundamentally contrary to monetary principles and difficult to succeed. This is also the fundamental reason why the Bretton Woods system (which pushed for the international currency to return to the gold standard) inevitably collapsed, and why cryptocurrencies like Bitcoin (whose total amount and phased increments are completely locked and non-adjustable) struggle to become true currencies, while non-anchored stablecoins of a single fiat currency find it hard to succeed; currency must withdraw from any specific item or items and become a purely fiat credit currency, highlighting its essential attributes.

Here, it is necessary to distinguish between the carrier or manifestation of currency and the currency itself. Shells, coins, banknotes, etc. are all carriers or manifestations of currency, not currency itself. The manifestation and operational mode of currency are increasingly moving towards intangibility, digitalization, and intelligence. The proportion of cash and cash payments in the total currency supply and total payment amount is decreasing, and currency is more often represented as deposits (represented by account numbers) and transfer payments/accounting settlements of deposits. Tangible cash (banknotes and coins) will eventually completely exit the stage of currency, and equating currency with cash is completely incorrect. At the same time, it is essential to accurately grasp the connotation of “currency” or “coin” and not to refer to all on-chain encrypted assets as “coins” or “tokenized”. Bitcoin, altcoins, NFTs, RWA, etc. can only be assets, not currency.

The On-Chain Crypto World Brings Profound Changes to Currency****Finance

Due to various practical issues, in the current fiat currency system, apart from a small amount of cash that can be directly exchanged between the payer and payee, an increasing amount of currency is stored in banks and other payment clearing institutions. The payer and payee need to use the clearing institution as an intermediary to transfer currency through transfer payments/accounting clearing. If both the payer and payee have accounts at the same bank, only one intermediary (the account-holding bank) is needed for the transfer payment; if they have accounts at different banks and the two banks have established a clearing account, then both banks will act as two intermediaries; if the two banks have not established an account relationship, it is necessary to find another bank with a common account relationship to act as a ‘bridge’ to ensure the connectivity of account relationships to complete the transfer of currency from the payer to the payee, which may require three or more intermediaries. In cross-border payment clearing, generally more than three intermediaries are needed and different payment clearing systems from various countries and regions are utilized to handle payment notifications with different languages and rules. Thus, the more intermediaries involved, the more complex the payment notification and clearing system becomes, which leads to lower efficiency and higher costs in payment clearing.

To improve the efficiency of payment clearing and reduce related costs, centralized account opening systems are basically implemented within countries, where all clearing institutions open accounts at the clearing center to minimize the number of bridging intermediaries. At the same time, a widely connected and intensively shared global interbank financial telecommunications association (SWIFT) has been established internationally, promoting the high standardization and unification of payment messages and global network processing, greatly improving the efficiency and cost of payment clearing. However, due to the difficulty in significantly reducing or completely eliminating payment clearing intermediaries, there is little fundamental breakthrough in efficiency and cost for cross-border payment clearing.

The emergence of the on-chain encrypted world has brought tremendous opportunities to the aforementioned issues. On a borderless global public chain, rules are built into the system (coding is the rule), user registration equates to account opening, and payments can be directly processed between the payer and payee without intermediaries, greatly improving efficiency and reducing costs, making the advantages over traditional cross-border payment settlements particularly significant. At the same time, by pushing financial products onto the public chain, sales and trading can occur on a global scale, significantly breaking through the limitations of off-chain financial markets, thus attracting a larger pool of investors and capital participation. This will undoubtedly attract more financial products, especially securities products with high levels of digitization and standardization (stocks, bonds, money market funds, etc.), to flow onto the chain through RWA, enriching the variety of on-chain encrypted assets, making trading more active, and having a more significant impact.

Deeper changes may include: legislation on stablecoins and crypto assets, which will encourage widespread participation from financial institutions such as banks. By interfacing with various public chains, they will support customers in directly converting off-chain fiat deposits into on-chain tokens or converting on-chain tokens back into fiat deposits, reducing the extra steps and costs associated with fiat to stablecoin conversions conducted by non-bank payment institutions. This will replace stablecoins as a more convenient channel connecting the crypto world and the real world. It will mitigate the challenges posed by the emergence of multiple stablecoins for a single fiat currency on regulatory oversight, facilitate the implementation of on-chain token statistics and customer identification (KYC), anti-money laundering (AML), and counter-terrorist financing (CFT) regulatory requirements, and curb the rapid expansion of fiat stablecoins that could significantly impact the existing financial system. It will enhance the opportunities for countries to equally utilize public chains, profoundly affecting the issuers of fiat stablecoins and the existing market landscape (including the absolute leading position of the US dollar stablecoin), the survival space of unregulated stablecoins and various “shitcoins”, and the international influence of SWIFT, while promoting the acceleration of traditional financial trading products towards RWA (Real World Assets) and attracting substantial participation from traditional licensed institutions in crypto asset trading and cryptocurrency exchange operations. Moreover, it may also have a substitutive effect on central bank digital currencies (CBDCs).

In this regard, China should have a clearer understanding and more proactive measures. The focus should not be on developing a stablecoin for the renminbi (which has very limited potential), but rather on accelerating the legislative process, speeding up the entry of banks, and promoting the development of RWA to achieve a leapfrog in progress.

Legislative Regulation of the On-Chain Crypto World Needs Continuous Strengthening and Improvement

The emergence and development of fiat-backed stablecoins have accelerated the on-chain crypto world’s transition from on-chain (native and derived) assets to Real-World Assets (RWA). Global public chains are also beginning to serve as intermediaries for off-chain cross-border settlements and remittance clearances, deepening the integration between the on-chain crypto world and the off-chain real world, with an increasing impact. This brings profound shocks to existing currency sovereignty and financial regulation. The lack of effective regulation is very frightening, and it is essential to strengthen the supervision of the process of real-world assets (especially fiat) going on-chain and off-chain, in order to meet the requirements of KYC, AML, CFT, etc.

Currently, the legislative regulation of fiat-backed stablecoins and the entire cryptocurrency asset market has only just begun. There is a need to seek a balance between encouraging innovation and preventing risks, as well as between the individual interests of countries or consortiums and the common interests of humanity. It is essential to improve the implementation details, control key risks, and particularly guard against the potential weakening of necessary regulations due to the U.S. fully supporting the crypto industry through legislation. We need to break free from the constraints of traditional thinking in the real world, pay close attention to the development of the crypto world, conduct serious research, and accurately grasp the situation. Responsible major powers must actively participate in the establishment of rules and maintenance of order in the crypto world and strengthen international cooperation.

The foundation and rules of the cryptocurrency world are based on the blockchain system and its built-in rules. The most widespread and influential is the borderless globalization of public blockchains (there are already many public chains globally, such as Ethereum, Solana, Binance Chain, Polkadot, etc.). Therefore, the global universality and fairness of blockchain rules, as well as the transparency and security of blockchain operations, become crucial foundations for the on-chain cryptocurrency world. The development of decentralized, non-state public chains and fair competition (efficiency, cost, fairness, security) should be encouraged, along with survival of the fittest and continuous improvement, to prevent individual countries or interest groups from controlling and utilizing the blockchain.

In summary, the profound impact of U.S. stablecoin legislation may exceed expectations.

(The author is a former vice president of Bank of China)