Former Governor of the People’s Bank of China, Zhou Xiaochuan, highlighted the potential risks that stablecoin usage could pose to the financial system. Zhou’s remarks, delivered during a closed-door seminar in July, were disclosed in notes released by the think tank CF40 on Wednesday. His comments came as the Chinese State Council was preparing to evaluate a roadmap for yuan-linked stablecoins.
Stablecoins: Overemphasized Necessity
Zhou, who served as the head of the People’s Bank of China from 2002 to 2018, argued that the necessity of integrating stablecoins into the current financial system has been exaggerated. According to him, only a limited number of financial services can benefit from tokenization and decentralization. Therefore, he suggested that the actual demand should be objectively questioned.
Zhou emphasized that the payment infrastructures in China and other Asian countries are already quite advanced. Thanks to QR codes linked to the banking system and NFC-based mobile applications, cost-effective and fast transactions can be performed without decentralized solutions. He also stated that central bank digital currencies (CBDCs) have contributed significantly to the advancement of the country’s payment system, achieving an already high level of efficiency.
Risk of Inadequate Reserves and Multiplier Effect
Zhou pointed out that stablecoin issuers might mint coins uncontrollably without maintaining adequate reserves, and custodians might fail to provide necessary oversight. He emphasized that the current lack of supervision could increase the risks of fraud and instability.
According to the former governor, even in issuances backed by full reserves, stablecoins could create a multiplier effect through chain transactions. The multi-layered use of coins in credit, mortgage, trading, and revaluation processes might impose a burden greater than what the reserves can cover. Zhou warned that a possible bank run scenario could lead to losses several times the size of the issuance reserves, adding that the U.S. Genius Act or Hong Kong regulations are insufficient to manage these risks.
Despite China’s ongoing ban on cryptocurrency trading and mining, the country’s consideration of yuan-linked stablecoins is seen as a response to developments in the U.S. and the region. While the U.S. encourages stablecoin use to strengthen the dollar’s global dominance, Japan and South Korea are also engaging in similar efforts. However, Chinese regulators maintain a cautious stance by warning local intermediaries to halt stablecoin introductions and research seminars.
