Within the red line and beyond the blue sea: The monetary boundaries in the stablecoin era

Author: Charlie Liu

As Wall Street and Silicon Valley bask in the warm atmosphere of the Thanksgiving long weekend, perhaps the last major news about stablecoins this year comes from Beijing across the ocean.

Last Friday, the central bank led a meeting of 13 major national ministries to establish a significant coordination mechanism to combat speculation in virtual currency trading. The core message of the media release after the meeting was very clear: activities related to virtual currency are considered illegal financial activities, and stablecoins are explicitly defined as a type of virtual currency, which cannot be circulated and used as currency in the market.

For readers who have been paying attention to the mainland market, this rhetoric is nothing new: the policy documents from 2021 are still valid, the red lines have not been loosened, and have even become clearer. Whether it's Bitcoin or various air coins, especially stablecoins which have gained a lot of attention this year, they are all categorized as “illegal financial activities” and continue to be a key focus for financial security prevention.

If your life and work mainly take place in the mainland, the conclusion is actually very simple: just don't touch it.

But for the many friends involved in overseas business or whose work focus is abroad, it is actually worth thinking a step further.

Since the beginning of this year, the U.S. Congress has passed the federal-level stablecoin bill, the GENIUS Act, incorporating “payment stablecoins” into a nationwide unified regulatory framework; on the Hong Kong side, the “Stablecoin Regulation” officially took effect on August 1 and has begun accepting applications for fiat-backed stablecoin licenses. The positioning of stablecoins in the two financial centers of the East and West is as “financial infrastructure that is conditionally included in the compliant payment system,” rather than simply treated as “toys in the crypto world.”

The same type of tools are “strictly targeted” in the mainland, while in the global open financial market they are “keyly regulated + supported.” In this contrast, a seemingly inconspicuous phrase in the central bank's press release – “closely monitor and dynamically assess the development of overseas stablecoins” – is worth our careful consideration.

Given that we are in the midst of a complex global political and economic situation, as well as the disruptive waves brought by AI and crypto, what we need to consider is, in an era where stablecoins are rewriting the global payment landscape and the digital dollar has infiltrated the financial systems and daily economic lives of many countries, what kind of monetary boundaries is China drawing?

The Red Line After Careful Consideration

From a macro and regulatory perspective, the mainland financial market needs this red line.

In the past decade, we have suffered too many losses from the phrase “financial innovation.” Shadow banking, P2P, campus loans, fake internet finance asset management, and the financialization of education and training… Each round of stories starts off beautifully: inclusive finance, technological empowerment, improving efficiency. The endings of these stories are often contrary to expectations: systemic risks, localized social events, plus a long period of trust that cannot be restored.

In this context, as long as something simultaneously meets several criteria—high volatility, high leverage, low entry barriers, and is technically difficult to fully penetrate—the regulatory instinct is certainly to “tighten up first and then talk.” And virtual currencies happen to fulfill all of these.

From defining Bitcoin as a “virtual commodity” in 2013, to halting ICOs and the involvement of financial institutions in 2017, and then to the joint announcement by ten departments in 2021 that comprehensively prohibited trading and mining, this line has been tightening all along. What this meeting did was to add another layer to this trajectory: explicitly pulling stablecoins into the category of virtual currencies, and naming them separately.

Why should stablecoins be included as well? This year's global stablecoin craze has revealed these two core characteristics.

First, stablecoins are more “like money,” so they are more sensitive.

Ordinary people may feel a sense of distance from Bitcoin due to its high volatility and obscure technical barriers. However, when looking at stablecoins like USDT and USDC, which carry the label “1:1 on-chain US Dollar,” it's easy to equate them with currency. But the problem is that their essence is not currency, but rather a form of circulation/expression of currency.

Moreover, since it can seamlessly integrate with bank accounts, financial products, and cross-border payment systems, once issues such as reserve fraud, bank runs, or defaults arise, the speed and scope of the impact on the real financial system will far exceed that of a purely speculative asset.

Second, stablecoins inherently possess the attribute of “cross-border”.

Technically, it is a string of digital symbols that can be transferred at any time between global nodes. If left unchecked, especially during this unprecedentedly complex and pressured period of the onshore financial system—deleveraging in real estate, local debts, shadow banking, and platform economy—adding another asset class that is not small in scale, whose price fluctuates with external emotions, and which can bypass some traditional controls, would directly elevate the complexity of the system.

Under such constraints, reiterating that “the policy document is still valid” clearly categorizes stablecoins in the mainland as “illegal financial activities”. In simple terms, it is easing the burden on this already difficult macro chess game.

From this perspective, the mainland's red line is not an impulsive decision, but a realistic choice to reduce the probability of chaos going out of control.

Trends that Do Not Change with Willpower

The problem is that the outside world won't hit the brakes just because we stop.

Looking at the mainstream representatives of the financial and technological axis in Europe and America: Visa, JPMorgan, SWIFT, it is evident that over the past year, stablecoins have indicated a reconstruction of clearing and payment networks, and even of banking and investment systems, suggesting that stablecoins and tokenization will be the new underlying layer of the global financial system.

In the United States, the core of the GENIUS Act is a common law-like balance: it both acknowledges that stablecoins have grown too large to disappear and does not want them to continue to thrive in a regulatory vacuum, so it simply incorporates “payment stablecoins” into a clear framework. Who can issue them, how much can be issued, what the underlying assets must be, how to audit, and how to disclose are all written into the legal text.

From that moment on, the issue of US dollar stablecoins officially upgraded from “gray innovation” to “new infrastructure running on a compliant track.” For banks, payment institutions, and technology platforms, stablecoins are no longer just toys for the crypto-native crowd, but a payment tool that can be integrated into their systems in compliance.

Interestingly, emerging markets have provided a fertile ground for stablecoins that no one anticipated.

In countries like Argentina, Turkey, Venezuela, and Nigeria, which are characterized by high inflation, long-term pressure on exchange rates, and frequent foreign exchange controls, many ordinary people simply do not have the time to discuss the logic of cryptocurrency prices. They are faced with a different reality: how to preserve purchasing power after receiving their salaries. For this group of people, opening an “on-chain dollar account” on their mobile phones is a choice with the lowest barriers, controllable costs, and not too restricted by the local banking system.

In countries like the Philippines, which are major labor-exporting nations, as well as remote work powerhouses like Argentina, Brazil, Nigeria, and Romania, stablecoins are increasingly appearing in cross-border remittance channels. Overseas workers use USDT to send money back home, which is then settled by local licensed institutions in the fiat currency world, or they directly hold affiliated wallets of offshore exchanges—remittance costs and settlement speeds are often more favorable than traditional channels.

Putting these pieces together, you will find an undeniable reality: with the basic but essential functions of payment and storage of value, stablecoins have already become the “de facto digital dollar infrastructure” in many countries.

From China's perspective, what truly deserves attention in this matter is not “how many people are making money by trading cryptocurrencies with it,” but rather: how the renminbi is preparing to occupy the market and mindset within the same organic ecosystem as the digital dollar has already penetrated the capillaries of overseas markets relying on the internet.

The Deep Meaning of “Dynamic Assessment of Foreign Stablecoins”

Looking back at the phrase “closely monitor and dynamically assess the development of overseas stablecoins.”

There are actually two core points here:

The first is “overseas”.

The second is “Evaluation”.

The term “overseas” clearly delineates the spatial boundary: being within the territory is not acceptable. Activities related to virtual currencies are considered illegal financial activities, and stablecoins are no exception; they do not have legal tender status and cannot be circulated or used in the market. The implication of this statement for relevant industries in mainland China is actually very straightforward and blunt: do not harbor any illusions within the red line.

“Assessment” has another layer of meaning. It indirectly acknowledges one thing: the overseas stablecoin infrastructure has already developed, and it is related to our interests—whether in Hong Kong, along the Belt and Road, or in a broader sense in Asia, Africa, and Latin America—simply and arbitrarily saying “not to look, not to listen, not to touch” is irresponsible towards the future of this great nation.

Hong Kong is a very direct window. After the “Stablecoin Regulation” comes into effect, fiat-backed stablecoin issuance is included in the licensing system of the Monetary Authority, providing guidelines on who can issue, how to issue, and how to accept prudent regulation afterwards.

From the perspective of the center, this is simply “Xiaogang Village” forty years later: you can see whether the compliance framework can block most risks, how banks, payment institutions, and stablecoin issuers engage in a game of strategy, whether users can accept the experience, and whether the connections with Wall Street and London can withstand external risks.

Looking further afield, nodes on the Belt and Road, such as the Astana International Financial Center in Kazakhstan, also serve as our stablecoin testing ground. Can a stablecoin denominated in offshore RMB, used for trade settlements between local and Chinese enterprises, effectively reduce exchange rate fluctuations and cross-border costs?

Or could it be like the interaction with electricity and AI computing power that I envisioned in my previous article, creating a new circulation closed loop for offshore RMB stablecoins?

These issues cannot be worked out just by discussing them in the conference room; we must let both the black cat and the white cat run around.

Back in the days of reform and opening up, we first had Shenzhen, Pudong, and a few special economic zones to test things out before seeing if they could be promoted; today, we are testing “digital renminbi-related tools under regulation, offshore renminbi stablecoins, and their interaction with US dollar stablecoins” in financial centers like Hong Kong and some friendly countries, and then we'll see whether to advance certain practices in the future.

Therefore, I prefer to understand it as a dual-track arrangement:

On one side, there is a clear attitude towards the domestic situation—this line will not sway just because of the commotion outside.

On the other hand, there is a calm judgment about the outside world—the digital dollar is already on its way, and the renminbi cannot afford to lose in the future currency war. What we can do is to carefully study and experiment, and feel our way across a new river without crossing our own bottom line.

Conclusion: The composure within the red line, the courage beyond the blue sea

Since the beginning of this year, in conversations with many overseas teams, financial institutions, and foreign investors, everyone surprisingly agrees on one judgment: The emergence of stablecoins represents that we are no longer just adding another type of currency, but rather quietly transforming into a new layer of global financial infrastructure.

For the United States, it is the on-chain dollar and even the on-chain everything, which is the next layer of expansion for the dollar system.

For many emerging market countries, it is a tool for nationals to hedge against local currency risks and to compensate for the shortcomings of local financial infrastructure.

For China, it is a question that cannot be bypassed - we cannot simply relax regulations domestically, but if we remain absent for a long time overseas, we will also have to pay the price.

From the perspective of someone engaged in macroeconomics, going overseas, and dealing with financial technology, I understand and respect the choice of the mainland to maintain this red line at the current stage.

Behind this line is an economy that is highly sensitive to systemic risks while digesting excess capacity, dealing with local debts, facing the aftermath of real estate issues, and confronting a demographic inflection point.

However, at the same time, if we lack the courage and imagination to “stand on the same playing field as digital dollars” in compliant overseas scenarios, the impact may be more far-reaching than any tightening of policies.

So this is the “dual mandate” before the policymakers in the new era (dual mandate):

Within the red line, maintain stability; beyond the blue ocean, strive for options.