Why is China banning stablecoins? Former Vice President of the Bank of China, Wang Yongli, reveals 4 major deadly reasons

China Digital Information Service Group Co-Chairman and former Vice President of the Bank of China Wang Yongli recently published an article elaborating on China’s resolute policy to halt stablecoins. He points out that China’s policy direction to accelerate the development of digital renminbi and firmly suppress virtual currencies, including stablecoins, has become completely clear. This is based on a comprehensive consideration of factors such as the global leading advantage of mobile payments, the sovereignty security of the renminbi, and the stability of the monetary and financial system.

USD Stablecoins 99% Market Share, China Focuses on Digital Renminbi

(Source: DefiLlama)

Wang Yongli states that the primary reason China is banning stablecoins is the limited space and opportunity for non-USD stablecoins. The USD stablecoin has been operating for over ten years, forming a complete international operational system that dominates the entire cryptocurrency trading market, accounting for over 99% of the global fiat stablecoin market cap and trading volume. This overwhelming market dominance leaves little room for competitors.

The advantages of USD stablecoins are built on two main foundations. First, the US dollar is the most liquid international reserve currency with the most comprehensive supporting ecosystem, making USD-pegged stablecoins the easiest to accept globally. Whether USDT or USDC, they benefit from the global credit and widespread acceptance of the US dollar. Second, the U.S. has taken a tolerant policy towards cryptocurrencies like Bitcoin and USD stablecoins for a long time, providing a relaxed regulatory environment for their development.

Therefore, under the U.S. push for USD stablecoins, it is very difficult for other countries or regions to launch non-USD fiat stablecoins on the international stage, except perhaps within their own sovereignty or on their own e-commerce platforms where some market space and opportunities may exist. The development space and practical significance are limited. This realistic assessment is the core logic behind China’s choice to ban rather than develop the renminbi stablecoin.

Wang Yongli’s analysis reveals a harsh reality: currency competition exhibits strong network effects and first-mover advantages. When USD stablecoins have already established a complete ecosystem of exchanges, wallets, payment channels, and user habits, even more technically advanced renminbi stablecoins are unlikely to shake the existing pattern. This “market failure timing” judgment has led China to pursue a different path, focusing on the development of the digital renminbi.

US Legislation Has Loopholes: Reserve Risks and DeFi Overissuance Hidden Dangers

Wang Yongli believes that even if U.S. stablecoin legislation takes effect, many problems and challenges remain, which constitute the second major reason for China’s halt on stablecoins. The legislation will significantly enhance the stability of stablecoins relative to the dollar, strengthen payment functions and compliance, but also expose systemic risks.

First, the potential for declining treasury bond prices to lead to reserve insufficiency. Stablecoin issuers typically invest reserve funds in short-term U.S. Treasuries to earn interest. However, if interest rates rise rapidly, causing bond prices to fall, the market value of reserves could fall below the total amount of stablecoins owed, triggering a run risk. Second, whether different stablecoins have fully consistent reserve asset structures and if central banks will back them unconditionally could create arbitrage opportunities, challenging regulation and market stability.

Finally, allowing decentralized finance (DeFi) to engage in stablecoin lending might produce derivatives and overissuance of stablecoins. This concern is not unfounded; the collapse of the 2022 algorithmic stablecoin UST is a typical case. If DeFi protocols lend out stablecoins using them as collateral, and these loans are used to borrow more stablecoins, it could generate credit derivatives, with the actual circulating stablecoins far exceeding the reserves held by issuers.

Three Structural Risks in U.S. Stablecoin Legislation

Reserve Asset Market Value Volatility: Falling treasury prices may cause 1:1 reserve shortfalls, triggering runs

Regulatory Arbitrage Opportunities: Differences in reserve structures among stablecoins and unclear central bank backing create arbitrage risks

DeFi Credit Overissuance: Decentralized lending might produce stablecoin circulation exceeding reserves

Wang Yongli states that the emergence and development of fiat-backed stablecoins, along with the on-chain inclusion of fiat currency and more real-world assets (RWA), have strongly supported on-chain crypto trading and development, serving as a bridge connecting the on-chain crypto world with the off-chain real world, thereby strengthening the integration and influence of crypto in real-world finance. Under such circumstances, without strengthened global joint regulation of stablecoins and crypto assets, the risks are very high.

Tokenization of Deposits Will Subvert the Stablecoin Market

Wang Yongli believes that legislation on stablecoins may severely backfire, which is the third major reason. After fiat stablecoins are included under regulatory oversight, it will inevitably drive legislation and regulation of crypto asset trading valuation and clearing using fiat stablecoins, including chain-native assets like Bitcoin and on-chain RWA. Once crypto assets are regulated and compliant protections are in place, banks and other financial institutions will fully participate.

The key threat is that banks and payment institutions can directly promote the on-chain operation of fiat deposits (deposit tokenization or “deposit tokens”), potentially replacing stablecoins as new channels and hubs connecting the crypto world with the real world. These “deposit tokens” have inherent advantages over privately issued stablecoins: banks are under strict regulation, enjoy deposit insurance, and are directly connected to the central bank’s settlement system, with much higher credit ratings.

Existing financial products such as stocks, bonds, money market funds, ETFs, and others can also be pushed on-chain. Once fiat is on-chain, not only can fiat stablecoins be replaced, but also central bank digital currencies (CBDC) might serve as alternatives, reducing the need for countries to make large investments in stablecoin infrastructure. Wang Yongli suggests that, compared to stablecoin legislation, the focus should be on accelerating crypto asset regulation, encouraging banks and financial institutions to move on-chain faster, and actively promoting RWA development.

Digital Renminbi’s Leading Advantages Cannot Be Diluted

China’s inability to follow the U.S. stablecoin route is the fourth major reason. China already holds a global leading advantage in mobile payments and digital renminbi, and promoting a renminbi stablecoin domestically offers no significant advantage. Internationally, there is little room for development and influence. Wang Yongli believes that China following the U.S. stablecoin path to develop a renminbi stablecoin not only cannot challenge the international status of USD stablecoins but might turn the renminbi stablecoin into a subordinate of the USD stablecoin.

In the face of complex and sharp international situations, China should prioritize national security and be highly vigilant against speculation and risks related to stablecoins and other crypto assets.