The evolving global financial landscape is placing increasing attention on stablecoins—digital currencies pegged to traditional assets like the U.S. dollar. As trade tensions and monetary policies shift, so too does market confidence in fiat currencies. At the 2025 Lujiazui Forum, discussions around stablecoins as potential alternatives to the dollar gained momentum. While some view them as tools for financial innovation, others warn of systemic risks and geopolitical implications. In this analysis, Sun Lijian, Director of the Financial Research Center at Fudan Development Institute, unpacks the mechanics, impacts, and future trajectory of dollar-backed stablecoins.
What Are Stablecoins? Understanding the Basics
Stablecoins are a category of cryptocurrency designed to minimize price volatility by being pegged to a reserve asset—most commonly the U.S. dollar. Unlike Bitcoin, which experiences significant price swings due to its limited supply and speculative demand, stablecoins aim to maintain a 1:1 parity with their underlying asset. This stability makes them uniquely suited for use in payments, settlements, and risk mitigation within the digital economy.
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Key Types of Stablecoins
There are three primary models:
- Fiat-Collateralized: Backed 1:1 by real-world assets such as USD or short-term U.S. Treasury bills. Examples include USDT (Tether) and USDC (Circle), which dominate the market.
- Crypto-Collateralized: Backed by other cryptocurrencies like Ethereum (ETH), but require over-collateralization (e.g., 150–200%) to absorb price fluctuations. DAI, issued via MakerDAO, is a leading example.
- Algorithmic: Use smart contracts and algorithms to control supply and maintain price stability without direct collateral. However, these carry high risk—as seen in the 2022 collapse of TerraUSD (UST), which lost its peg and wiped out $40 billion in value.
How Do They Stay "Stable"?
For fiat-backed stablecoins, stability hinges on two pillars:
- Reserve Transparency: Issuers must hold dollar-denominated assets (cash or Treasuries) equivalent to the number of coins in circulation.
- Regulatory Compliance: Under the U.S. Guiding and Establishing National Innovation in Stablecoins Act (GENIUS Act), passed in June 2025, issuers must undergo regular audits and comply with anti-money laundering (AML) and know-your-customer (KYC) standards.
Despite claims of full backing, transparency remains a concern. For instance, Tether faced a $41 million penalty in 2021 for failing to disclose reserve shortfalls. Today, however, most major stablecoins publish monthly attestation reports to rebuild trust.
Core Use Cases of Stablecoins
Stablecoins serve critical functions across the digital economy:
- Safe Haven in Crypto Markets: During market downturns, traders convert volatile assets like Bitcoin into USDC or USDT to preserve value. Binance reported a single-day inflow of $4.3 billion into stablecoins during a major crash in 2024.
- Efficient Cross-Border Payments: In countries like the Philippines, migrant workers use USDT for remittances at a fraction of traditional banking fees—just 0.1% compared to an average of 6.3% globally (World Bank, 2024).
- Backbone of DeFi Ecosystems: On decentralized exchanges like Uniswap, over 80% of trading pairs involve dollar-denominated stablecoins such as ETH/USDC.
- Inflation Hedge: In Argentina, where inflation hit 289% annually in mid-2024, citizens turned to USDT to protect their savings from rapid currency depreciation.
Frequently Asked Questions
Q: Are stablecoins really safe?
A: While they're more stable than other cryptocurrencies, risks remain—especially around reserve quality, regulatory changes, and issuer solvency. Events like USDC briefly dropping to $0.87 during the 2023 Silicon Valley Bank crisis highlight their vulnerability.
Q: Who can issue stablecoins?
A: Both fintech firms (like Circle) and traditional financial institutions can become issuers, provided they meet strict regulatory requirements including capital adequacy and audit compliance.
Q: Can stablecoins replace traditional money?
A: Not fully yet. They lack universal legal tender status and widespread acceptance outside crypto ecosystems. However, their role in cross-border finance and DeFi suggests growing influence.
Q: Do stablecoins pay interest?
A: Some platforms previously offered yield-bearing stablecoin products, but the GENIUS Act now prohibits interest payments to prevent disintermediation of banks.
Q: Is there global regulation for stablecoins?
A: Regulation is fragmented. The U.S., EU (via MiCA), and Hong Kong have introduced frameworks, but only about 35% of stablecoin issuers currently comply with FATF’s “Travel Rule” for anti-money laundering.
Impact on the Global Monetary System
Dollar-backed stablecoins are not just technological innovations—they’re reshaping monetary power dynamics.
Reinforcing Dollar Dominance
By linking digital assets to the U.S. dollar and Treasury markets, stablecoins extend America’s financial reach. The GENIUS Act enables regulated issuance that channels global capital into dollar-denominated assets, effectively expanding digital seigniorage—the profit from issuing currency.
In high-inflation economies like Argentina and Turkey, over 30% of crypto users hold stablecoins as savings vehicles (IMF, 2024). This trend accelerates digital dollarization, weakening local monetary policy effectiveness.
Effects on Financial Markets
Stablecoin reserves increase demand for short-term U.S. Treasuries, influencing yields. When inflows rise, yields drop; outflows can spike volatility. During the SVB collapse, USDC’s temporary de-peg triggered $620 million in DeFi liquidations within 24 hours—demonstrating systemic risk.
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Moreover, interest-free mandates under new regulations reduce competition with banks, mitigating disintermediation risks.
Geopolitical Implications
While 99% of fiat-backed stablecoins are tied to the dollar and 90% of cross-border crypto payments use USD-pegged tokens (BIS), this concentration creates fragility. A loss of confidence could trigger massive redemptions, destabilizing both stablecoin ecosystems and U.S. debt markets.
Meanwhile, nations like China are responding by advancing digital currencies such as e-CNY to counterbalance dollar dominance.
Challenges for Financial Sovereignty and Regulation
Stablecoins challenge national monetary control in several ways:
- Capital Flight Risks: In China, an estimated $12 billion flowed out through USDT in 2023 via fake trade or mining operations.
- Pricing Power Erosion: Offshore markets now offer USDT-denominated RMB derivatives, diverting pricing authority away from mainland institutions.
- Data Sovereignty Concerns: Circle disclosed over 2,000 China-linked wallet addresses to U.S. authorities in 2023—raising alarms about surveillance and jurisdictional overreach.
Regulatory coordination lags behind innovation:
- Jurisdictional ambiguity plagues global oversight (e.g., Tether is registered in the Cayman Islands but serves users worldwide).
- Compliance gaps persist—only a minority of issuers follow international AML standards.
China's Strategic Response
China has adopted a dual-track strategy: strict domestic controls combined with offshore innovation.
Regulatory Measures
- Domestic use of stablecoins is banned; banks and payment processors are prohibited from servicing crypto exchanges.
- Over 120 overseas exchange IPs have been blocked since 2024; domestic USDT trading volume dropped by 82%.
- The SAFE “Chain Eye” system flags cross-border transfers exceeding $50,000.
Technological Countermeasures
- Expansion of digital RMB pilots in energy trading (Shanghai crude oil futures), stock settlements (Hong Kong), and international corridors (China-Saudi oil deals via mBridge).
- Development of quantum-resistant encryption and interoperability protocols for future CBDC integration.
- Embedded “regulatory probes” in digital yuan allow real-time tracking of large transactions—$24 million in illicit flows were intercepted at Shenzhen customs alone.
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International Engagement
- Advocacy through IMF and FSB for multilateral governance.
- Bilateral agreements with Russia and Iran to settle 30% of energy imports in digital RMB by 2025.
- Collaboration with ASEAN on emergency liquidity pools and open-source payment protocols to bypass U.S.-centric infrastructure.
Conclusion: Navigating the Future of Money
Stablecoins represent both an evolution and a disruption—a bridge between legacy finance and blockchain innovation. While they enhance efficiency and access, they also amplify systemic risks and threaten monetary sovereignty.
For China and other nations, the path forward lies in a three-phase strategy:
- Defensive Regulation: Block uncontrolled capital flows and protect financial stability.
- Ecosystem Building: Anchor digital currency to real-economy use cases like trade and commodities.
- Global Rule-Shaping: Lead in setting international standards for interoperability and governance.
As the world enters a new era of digital monetary competition, the battle isn’t just about technology—it’s about who defines the rules of money itself.
Core Keywords: stablecoin, USDC, USDT, digital currency, DeFi, CBDC, dollar dominance, crypto regulation