CICC: The Potential Impact of Stablecoins on the Financial System

Authors: Lin Yingqi, Zhou Jiming, et al., CICC

Milestone in Cryptocurrency Regulation. Recently, the United States passed a stablecoin bill, becoming the first legislation in the U.S. to establish a regulatory framework for stablecoins, filling a regulatory gap in this area. Just two days later, Hong Kong also passed a similar stablecoin bill, which will help Hong Kong participate in the global digital financial center competition and consolidate its status as an international financial center. Stablecoins serve as a "bridge" between the traditional financial system and decentralized finance (DeFi). Following the European Union, both the U.S. and Hong Kong have introduced regulatory frameworks for stablecoins, marking an important step for cryptocurrencies to integrate into the mainstream financial system.

From "Wild Growth" to Gradual Standardization. The recent stablecoin-related legislation primarily addresses risk points that have emerged in the industry, including the opacity of reserve assets, liquidity management risks, instability of algorithmic stablecoin values, money laundering and illegal financial activities, and insufficient consumer protection, establishing a series of regulations. The legislation references the regulatory frameworks for traditional financial institutions but is stricter in liquidity management. The statutory reserve requirement for banks in the U.S., EU, and Hong Kong is close to 0%, while the reserve requirement for stablecoin issuers is set at 100%. We believe this is mainly due to the existing mature and strict regulation of banks, where deposit liquidity is relatively stable; however, stablecoins do not pay interest and are traded more frequently. Foreign regulators position stablecoins not as "on-chain deposits" but as "on-chain cash," thereby solidifying the foundation of the decentralized financial system.

How to Understand the Impact of Stablecoins on the Financial System? As of the end of May 2025, the total market capitalization of mainstream stablecoins is approximately $230 billion, representing a growth of over 40 times compared to the scale at the beginning of 2020, with a rapid growth rate. However, compared to the scale of the mainstream financial system, it remains relatively small, only equivalent to 1% of onshore deposits in the U.S. But in terms of transaction volume, stablecoins play a significant role as an important payment method and infrastructure within the cryptocurrency system, with the annual transaction volume of mainstream stablecoins (USDT and USDC) reaching $28 trillion, surpassing the annual transaction volume of credit card organizations Visa and Mastercard. As stablecoins are incorporated into the financial regulatory framework, decentralized finance is expected to welcome development opportunities and deepen its integration with the traditional financial system.

Lower Cost and Higher Efficiency in International Payments. According to the World Bank, as of the third quarter of 2024, the average remittance fee globally is 6.62%, while the United Nations' 2030 Sustainable Development Goals require this fee to be reduced to no more than 3%, with a delivery time of 1-5 working days. The efficiency of the traditional financial system is mainly affected by the need to go through multiple intermediary banks in the SWIFT network. In contrast, using stablecoins for remittances generally incurs transaction costs of less than 1%, with delivery times typically within a few minutes. However, it is worth noting that before the legislation was introduced, stablecoin payments had not been included in KYC and anti-money laundering regulations, posing challenges to cross-border capital account controls in emerging markets. Therefore, although using stablecoins for cross-border payments is technically more efficient, this difference is partly due to regulatory disparities, and as regulations become standardized, the compliance costs for stablecoins may also increase. Due to potential impacts on capital accounts and monetary sovereignty in emerging markets, there are also regulatory restrictions on stablecoins in some countries and regions. In the long run, as the regulatory framework improves, we expect the market share of stablecoins in international payments to increase, although this process will still be accompanied by industry development and regulatory improvements.

Full Reserve Requirements Limit Currency Creation Function: The theoretical requirement for 100% reserve assets limits the ability of stablecoin issuers to engage in credit expansion. The process of converting deposits into stablecoins is essentially a transfer of bank deposits rather than a creation of new money. Therefore, the issuance of stablecoins theoretically does not affect the supply of U.S. dollars. Specifically:

1. If reserve assets are used for deposits, the money supply remains unchanged, as household deposits are converted into an equivalent amount of stablecoins and interbank deposits. If reserve assets are used to purchase U.S. Treasury bonds held by residents, enterprises, and non-bank institutions, the money supply remains unchanged, as market-circulating Treasury bonds are converted into stablecoins. However, if funds continue to flow out of deposits, it may lead to banks shrinking their balance sheets and a decrease in the money supply.

2. U.S. dollar stablecoins attract other currencies, and the process of converting other currencies into U.S. dollar stablecoins effectively results in a currency exchange effect, but this manifests as the cross-border or cross-account flow of U.S. dollars, without affecting the total supply of U.S. dollars.

3. Lending platforms that use cryptocurrencies as collateral effectively perform a credit creation function similar to banks, increasing the scale of "quasi-money" (i.e., stablecoins) within the decentralized financial system, but do not affect the supply of traditional money. Since the application scenarios of the crypto asset financial system are primarily concentrated in payment and investment areas, lending is mainly based on speculative demand. As of the end of 2024, the scale of crypto asset lending platforms is approximately $37 billion, which is relatively small.

Impact on Bank Deposit Disintermediation. The impact of stablecoins on the banking system primarily manifests as a financial disintermediation effect (i.e., decentralization). The conversion of deposits into stablecoins may lead to deposit outflows. This effect is similar to the impact of money market funds and high-yield bond markets on the banking system. For example, since 2022, in the high-interest-rate environment in the U.S., deposits have flowed into money market funds by approximately $2.3 trillion, becoming one of the triggering factors for the Silicon Valley Bank risk event. According to statistics from the Federal Deposit Insurance Corporation (FDIC), as of the end of 2024, of the approximately $18 trillion in deposits held by U.S. banks, about $6 trillion are transactional deposits, classified by the U.S. Treasury as deposits theoretically facing outflow risks. However, considering that the development of stablecoins has been incorporated into the government regulatory framework, the impact on the financial system is relatively controllable. At the same time, traditional banks are also exploring ways to adapt to the trend of stablecoin development and address the challenges of deposit diversion. For example, JPMorgan Chase has launched JPM Coin to facilitate cross-border payments and securities trading for institutional clients; Société Générale has introduced USD CoinVertible and EUR CoinVertible for institutions and investors; Standard Chartered has established a joint venture to issue a Hong Kong dollar stablecoin and apply for a license from the Hong Kong Monetary Authority, among others.

Undertaking Government Debt and Influencing Monetary Policy Transmission. As of the first quarter of 2025, issuers of USDT and USDC hold approximately $120 billion in U.S. Treasury reserves. If combined as a single "economy," they rank 19th among foreign holders of U.S. Treasury bonds, between South Korea and Germany. As the market capitalization of stablecoins rises, we expect the demand for U.S. Treasury bonds as reserve assets to increase. However, it is important to note that stablecoins can primarily undertake short-term U.S. Treasury bonds with maturities of less than three months, and we expect their capacity to absorb long-term Treasury bonds to be limited. The interest rates on short-term Treasury bonds are influenced by central bank monetary policy, depending on factors such as inflation and employment in the real economy. Regarding monetary policy, when stablecoin issuers buy U.S. Treasury bonds, they lower short-term interest rates, prompting the central bank to withdraw money to hedge; in the long run, the attraction of stablecoins to deposits may lead to financial disintermediation, resulting in a shift of financing from the traditional financial system to the decentralized financial system, which may also weaken the effectiveness of central bank monetary policy.

Price Volatility of Crypto Assets and Its Transmission to Financial Markets. The impact of stablecoins on financial markets can be understood in three aspects:

1. From the perspective of money creation, as mentioned earlier, lending activities within the decentralized financial system achieve the creation function of "quasi-money," especially through stablecoins purchasing tokenized stock assets, which directly causes funds to flow in and out of the stock market.

2. From the perspective of market sentiment, the price volatility of cryptocurrencies is significant, affecting stock market expectations. Historically, there has been a certain correlation between the Nasdaq index and Bitcoin prices.

3. In the stock market, assets related to cryptocurrencies and stablecoins, such as cryptocurrency exchanges and financial institutions, influence stock prices through changes in fundamentals.

Potential Restructuring Force in the International Monetary Order. For the U.S. dollar, the impact of stablecoins is somewhat "contradictory": on one hand, since 99% of fiat stablecoins are pegged to the dollar, the development of stablecoins seems to reinforce the dollar's dominant position in the global financial system; on the other hand, the international context of the development of stablecoins and cryptocurrencies is based on the rising risks of de-globalization trends, geopolitical restrictions in the financial sector, and weakened fiscal discipline, leading to a demand for de-dollarization in some economies. Therefore, the strong peg of stablecoins to the dollar not only reflects the dollar's dominance in the global financial hierarchy but also serves as a "bridge" towards a more diversified new order in the global financial system. This may explain why the recent rise and popularity of crypto asset prices have coincided with the intensification of de-globalization trends. Additionally, the recent actions by the EU and Hong Kong have opened up space for the issuance of non-dollar stablecoins, competing with the dollar's dominant position in the stablecoin sector. In the long run, whether the dollar's position is further strengthened under the guidance of new regulatory frameworks for stablecoins or challenged by other currencies and crypto assets remains to be observed as the industry develops. For emerging economies, since stablecoins are competitive with local currencies, if local residents and enterprises use stablecoins for settlement, it may lead to the local currency effectively being exchanged for dollars, resulting in currency depreciation and inflation. Therefore, for financial security reasons, several economies have implemented restrictions on the use of stablecoins.

Implications for Currency Internationalization. For the Hong Kong dollar, regulating the issuance of stablecoins, especially Hong Kong dollar stablecoins, will help enhance the influence of the Hong Kong dollar in cross-border payments and crypto assets, strengthening the international competitiveness of Hong Kong's financial industry and the Hong Kong dollar, thereby consolidating Hong Kong's status as an international financial center. At the same time, Hong Kong can leverage its financial market advantages and the institutional innovations brought by the stablecoin legislation to provide a "testing ground" for the internationalization of other currencies. The legislation allows for the issuance of non-dollar stablecoins, which can expand the use of non-dollar currencies in international payments, settlements, and investment scenarios, accelerating the process of internationalization. In summary, the Hong Kong stablecoin legislation has profound implications for currency internationalization, but this process still requires ongoing attention to financial stability risks and timely optimization and adjustment of relevant policies.

Risks Risks in the development of the cryptocurrency industry, the impact of stablecoins on the traditional financial system exceeding expectations, and the slow advancement of regulatory policies.

Main Text Stablecoin Legislation: A Milestone in Cryptocurrency Regulation The EU, U.S., and Hong Kong Establish Stablecoin Regulatory Frameworks Stablecoins are a type of cryptocurrency that peg their value to specific assets (usually fiat currencies), serving as a bridge between decentralized financial systems (DeFi) and traditional financial systems, and are also an important infrastructure of DeFi. Recently, the U.S. passed a stablecoin bill, becoming the first legislation in the U.S. to establish a regulatory framework for stablecoins, filling a regulatory gap in this area. Just two days later, Hong Kong also passed a similar stablecoin bill, which will help Hong Kong participate in the global digital financial center competition and consolidate its status as an international financial center. Stablecoins serve as a "bridge" between the traditional financial system and decentralized financial systems (DeFi). Following the European Union, both the U.S. and Hong Kong have introduced regulatory frameworks for stablecoins, marking an important step for cryptocurrencies to integrate into the mainstream financial system. Chart 1: Initial Characteristics of Crypto Assets as Currency and Financial Systems Source: CICC Research Department Chart 2: Principles of Mainstream Stablecoins Source: Tether, MakerDao, CICC Research Department Chart 3: Dominance of Dollar Stablecoins Collateralized by Highly Liquid Assets Note: Data as of May 31, 2025
Source: CoinGecko, CICC Research Department From "Wild Growth" to Gradual Standardization Previously, the stablecoin sector experienced several significant risks and regulatory events, including the collapse of TerraUSD (UST) in 2022, regulatory restrictions on Tether (USDT) due to unclear underlying assets in the EU in 2024, and the New York financial regulator's requirement for Binance USD (BUSD) to stop minting in 2023. The recent stablecoin-related legislation in the U.S. and Hong Kong primarily addresses risk points that have emerged in the industry, including the opacity of reserve assets, liquidity management risks, instability of algorithmic stablecoin values, money laundering and illegal financial activities, and insufficient consumer protection, establishing a series of regulations. The main content includes:

1. In terms of liquidity, stablecoin reserve assets must be 100% pegged to fiat currencies or highly liquid assets, including cash, demand deposits, and short-term U.S. Treasury bonds. Reserve assets must be isolated from operating funds to prevent misappropriation.

2. In terms of entry qualifications, issuing institutions must obtain regulatory licenses and establish minimum capital entry thresholds.

3. Stablecoins must be incorporated into existing anti-money laundering regulatory frameworks, with customer identity verification requirements set.

4. In terms of consumer protection, it must be ensured that users can redeem at face value, and in the event of bankruptcy, customer funds have priority for repayment.

5. It is explicitly prohibited for stablecoins to pay interest, in order to reduce the impact on the traditional financial system.

In fact, the above stablecoin legislation references the regulatory frameworks for traditional financial institutions, setting similar requirements for licenses, capital, liquidity management, anti-money laundering, and consumer protection, but is stricter in liquidity management. The statutory reserve requirement for banks in the U.S., EU, and Hong Kong is close to 0%, while the reserve requirement for stablecoin issuers is set at 100%. We believe this is mainly due to the existing mature and strict regulation of banks, and that bank customer deposits generally arise from the savings and operational needs of residents and enterprises, with banks also paying interest on deposits, resulting in relatively stable deposit liquidity. However, stablecoins are required not to pay interest and are traded more frequently, leading to unstable liquidity conditions. Moreover, stablecoins, as important infrastructure for decentralized finance (DeFi) pegged to fiat currencies like the U.S. dollar, require stronger reserve assets as underlying support. In summary, foreign regulators position stablecoins not as "on-chain deposits" but as "on-chain cash" (despite the issuer being a commercial entity, which distinguishes them from central bank digital currencies), thereby solidifying the foundation of the decentralized financial system. Chart 4: The Stablecoin Regulatory Framework is Becoming More Complete Source: U.S. Senate, Hong Kong Monetary Authority, EU Parliament, CICC Research Department How to Understand the Impact of Stablecoins on the Financial System? In terms of scale, as of the end of May 2025, the total market capitalization of mainstream stablecoins is approximately $230 billion, representing a growth of over 40 times compared to the scale at the beginning of 2020, with a rapid growth rate. However, compared to the scale of the mainstream financial system, it remains relatively small, such as U.S. dollar deposits (approximately $19 trillion in onshore deposits), U.S. Treasury bonds (approximately $37 trillion), and is also smaller than mainstream cryptocurrencies (Bitcoin's market capitalization is approximately $2 trillion). However, in terms of transaction volume, stablecoins play a significant role as an important payment method and infrastructure within the cryptocurrency system. According to institutional estimates, the annual transaction volume of mainstream stablecoins (USDT and USDC) reaches $28 trillion, surpassing the annual transaction volume of credit card organizations Visa and Mastercard (approximately $26 trillion, although the high-frequency trading of stablecoins may make this data not entirely comparable); this figure also exceeds the transaction volume of Bitcoin in 2024 (approximately $19 trillion). As stablecoins are incorporated into the financial regulatory framework, decentralized finance is expected to welcome development opportunities and deepen its integration with the traditional financial system, also bringing new challenges and risks to the global financial system. 1. Lower Cost and Higher Efficiency in International Payments According to the World Bank, as of the third quarter of 2024, the average remittance fee globally is 6.62%, while the United Nations' 2030 Sustainable Development Goals require this fee to be reduced to no more than 3%, with a delivery time of 1-5 working days. The efficiency of the traditional financial system is mainly affected by the need to go through multiple intermediary banks in the SWIFT network. In contrast, using stablecoins for remittances generally incurs transaction costs of less than 1%, with delivery times typically within a few minutes. However, it is worth noting that before the legislation was introduced, stablecoin payments had not been included in KYC and anti-money laundering regulations, posing challenges to cross-border capital account controls in emerging markets. Therefore, although using stablecoins for cross-border payments is technically more efficient, this difference is partly due to regulatory disparities, and as regulations become standardized, the compliance costs for stablecoins may also increase. Due to potential impacts on capital accounts and monetary sovereignty in emerging markets, there are also regulatory restrictions on stablecoins in some countries and regions. In the long run, as the regulatory framework improves, we expect the market share of stablecoins in international payments to increase, although this process will still be accompanied by industry development and regulatory improvements. Chart 5: Comparison of Traditional Cross-Border Payment and Stablecoin Payment Models Source: SWIFT, CICC Research Department 2. Full Reserve Requirements Limit Currency Creation Function The theoretical requirement for 100% reserve assets limits the ability of stablecoin issuers to engage in credit expansion. The process of converting deposits into stablecoins is essentially a transfer of bank deposits rather than a creation of new money. Therefore, the issuance of stablecoins theoretically does not affect the supply of U.S. dollars. Specifically:

1. If reserve assets are used for deposits, the money supply remains unchanged, as household deposits are converted into an equivalent amount of stablecoins and interbank deposits. If reserve assets are used to purchase U.S. Treasury bonds held by residents, enterprises, and non-bank institutions, the money supply remains unchanged, as market-circulating Treasury bonds are converted into stablecoins. However, if funds continue to flow out of deposits, it may lead to banks shrinking their balance sheets and a decrease in the money supply.

2. U.S. dollar stablecoins attract other currencies, and the process of converting other currencies into U.S. dollar stablecoins effectively results in a currency exchange effect, but this manifests as the cross-border or cross-account flow of U.S. dollars, without affecting the total supply of U.S. dollars.

3. Lending platforms that use cryptocurrencies as collateral effectively perform a credit creation function similar to banks, increasing the scale of "quasi-money" (i.e., stablecoins) within the decentralized financial system, but do not affect the supply of traditional money. Since the application scenarios of the crypto asset financial system are primarily concentrated in payment and investment areas, lending is mainly based on speculative demand. As of the end of 2024, the scale of crypto asset lending platforms is approximately $37 billion, which is relatively small. Chart 6: Mechanism of Stablecoins' Impact on Traditional Money Supply Source: U.S. Treasury, CICC Research Department Chart 7: Impact of Stablecoin Issuance on Money Supply Source: CICC Research Department 3. Impact on Bank Deposit Disintermediation The impact of stablecoins on the banking system primarily manifests as a financial disintermediation effect (i.e., decentralization). The conversion of deposits into stablecoins may lead to deposit outflows. Although stablecoin issuers purchasing Treasury bonds, reverse repos, and other assets may cause deposits to flow back to banks, in the long run, this will lead to banks replacing savings deposits with interbank liabilities or causing banks to reduce their bond holdings, resulting in pressure on bank interest margins and erosion of profits. This effect is similar to the impact of money market funds and high-yield bond markets on the banking system. For example, since 2022, in the high-interest-rate environment in the U.S., deposits have flowed into money market funds by approximately $2.3 trillion, becoming one of the triggering factors for the Silicon Valley Bank risk event.

From the perspective of the stablecoin legislation, the U.S. regulatory framework explicitly requires stablecoins not to pay interest, which can reduce the attraction of stablecoins to deposits to some extent. The vast majority of deposits are used for daily cash clearing, which has a degree of stickiness. Although the scale of stablecoins has grown rapidly, it is still only about 1% of the scale of deposits in U.S. banks. Assuming that the scale of stablecoins maintains an annual growth rate of 15% over the next three years, by 2030, the attraction to deposits could be about $200-300 billion, accounting for about 1% of total deposits, which is relatively limited. However, in the long run, there are two risks:

1. The development speed of stablecoins exceeds expectations. For example, U.S. Treasury Secretary Yellen cited market forecasts suggesting that by 2028, the scale of stablecoins could rise from the current $200-300 billion to $2 trillion, implying an eightfold growth rate within three years, significantly higher than the recent annual growth rate of 15%.

2. Stablecoins may become more convenient to obtain investment returns through indirect means, such as investing in tokenized money market funds, real-world assets (RWAs) that generate income, staking derivatives, etc., making non-interest-paying stablecoins yield returns and increasing their attractiveness to deposits.

According to statistics from the FDIC, as of the end of 2024, of the approximately $18 trillion in deposits held by U.S. banks, about $6 trillion are transactional deposits, classified by the U.S. Treasury as deposits theoretically facing outflow risks. However, we believe that considering the development of stablecoins has been incorporated into the government regulatory framework, the impact on the financial system is also included in the policy decision-making considerations, making the impact relatively controllable.

At the same time, traditional banks are also exploring ways to adapt to the trend of stablecoin development and address the challenges of deposit diversion. For example, JPMorgan Chase has launched JPM Coin to facilitate cross-border payments and securities trading for institutional clients; Société Générale has introduced USD CoinVertible and EUR CoinVertible for institutions and investors; Standard Chartered has established a joint venture to issue a Hong Kong dollar stablecoin and apply for a license from the Hong Kong Monetary Authority, among others. Chart 8: Deposits Facing Outflow Risks are Mainly Non-Interest-Bearing Transactional Deposits Source: FDIC, CICC Research Department Chart 9: Disintermediation Phenomenon of U.S. Deposits Intensified in High-Interest Rate Environment Source: Federal Reserve, FDIC, CICC Research Department 4. Undertaking Government Debt and Influencing Monetary Policy Transmission Stablecoin issuers have become buyers of U.S. Treasury bonds. The reserve assets of USDT and USDC are primarily composed of short-term U.S. Treasury bonds and reverse repurchase agreements, with short-term U.S. Treasury bonds accounting for 66% and 41% of the reserve assets of USDT and USDC, respectively. As of the first quarter of 2025, issuers of USDT and USDC hold approximately $120 billion in U.S. Treasury reserves. If combined as a single "economy," they rank 19th among foreign holders of U.S. Treasury bonds, between South Korea and Germany.

How to understand the role of stablecoins in undertaking government debt? As the market capitalization of stablecoins rises, we expect the demand for U.S. Treasury bonds as reserve assets to increase. If we consider the market forecast cited by U.S. Treasury Secretary Yellen, suggesting that by 2028, the scale of stablecoins could rise from the current $200-300 billion to $2 trillion, it would exceed the current largest holder of U.S. Treasury bonds, Japan. However, it is important to note that stablecoins can primarily undertake short-term U.S. Treasury bonds with maturities of less than three months, and we expect their capacity to absorb long-term Treasury bonds to be limited. The interest rates on short-term Treasury bonds are influenced by central bank monetary policy, depending on factors such as inflation and employment in the real economy. The central bank can hedge by reducing or increasing the issuance of base money.

Impact on Monetary Policy Transmission. As mentioned earlier, when stablecoin issuers buy U.S. Treasury bonds, they lower short-term interest rates, prompting the central bank to withdraw money to hedge; in the long run, the attraction of stablecoins to deposits may lead to financial disintermediation, resulting in a shift of financing from the traditional financial system to the decentralized financial system, which may also weaken the effectiveness of central bank monetary policy. Chart 10: USDT and USDC Reserve Assets Primarily Composed of Short-Term Treasury Bonds and Reverse Repos Note: As of the first quarter of 2025

Source: Tether, Circle, CICC Research Department Chart 11: In the Long Run, Stablecoins May Undertake Some Demand for U.S. Treasury Bonds Note: The scale of U.S. Treasury bonds held by stablecoins in 2030 is based on market forecasts cited by U.S. Treasury Secretary Yellen

Source: U.S. Treasury, Tether, Circle, CICC Research Department Chart 12: Recent Decline in Mainland China's Holdings of U.S. Treasury Bonds Source: U.S. Treasury, CICC Research Department 5. Price Volatility of Crypto Assets and Its Transmission to Financial Markets The impact of stablecoins on financial markets can be understood in three aspects:

1. From the perspective of money creation, as mentioned earlier, lending activities within the decentralized financial system achieve the creation function of "quasi-money," especially through stablecoins purchasing tokenized stock assets, which directly causes funds to flow in and out of the stock market.

2. From the perspective of market sentiment, the price volatility of cryptocurrencies is significant, affecting stock market expectations. Historically, there has been a certain correlation between the Nasdaq index and Bitcoin prices.

3. In the stock market, assets related to cryptocurrencies and stablecoins, such as cryptocurrency exchanges and financial institutions, influence stock prices through changes in fundamentals. Chart 13: There is a Correlation Between Cryptocurrency Prices and the Nasdaq Index Source: Bloomberg, CICC Research Department 6. Potential Restructuring Force in the International Monetary Order For the U.S. dollar, the impact of stablecoins is somewhat "contradictory": on one hand, since 99% of fiat stablecoins are pegged to the dollar, the development of stablecoins seems to reinforce the dollar's dominant position in the global financial system; on the other hand, the international context of the development of stablecoins and cryptocurrencies is based on the rising risks of de-globalization trends, geopolitical restrictions in the financial sector, and weakened fiscal discipline, leading to a demand for de-dollarization in some economies. Therefore, the strong peg of stablecoins to the dollar not only reflects the dollar's dominance in the global financial hierarchy but also serves as a "bridge" towards a more diversified new order in the global financial system. This may explain why the recent rise and popularity of crypto asset prices have coincided with the intensification of de-globalization trends. Additionally, the recent actions by the EU and Hong Kong have opened up space for the issuance of non-dollar stablecoins, competing with the dollar's dominant position in the stablecoin sector. In the long run, whether the dollar's position is further strengthened under the guidance of new regulatory frameworks for stablecoins or challenged by other currencies and crypto assets remains to be observed as the industry develops.

For emerging economies, since stablecoins are competitive with local currencies, if local residents and enterprises use stablecoins for settlement, it may lead to the local currency effectively being exchanged for dollars, resulting in currency depreciation and inflation. Therefore, for financial security reasons, several economies have implemented restrictions on the use of stablecoins. Chart 14: The Dollar Dominates Major Financial Systems Note: Data as of the end of 2024
Source: Brookings, U.S. Treasury, CICC Research Department 7. Implications for Currency Internationalization For the Hong Kong dollar, regulating the issuance of stablecoins, especially Hong Kong dollar stablecoins, will help enhance the influence of the Hong Kong dollar in cross-border payments and crypto assets, strengthening the international competitiveness of Hong Kong's financial industry and the Hong Kong dollar, thereby consolidating Hong Kong's status as an international financial center. At the same time, Hong Kong can leverage its financial market advantages and the institutional innovations brought by the stablecoin legislation to provide a "testing ground" for the internationalization of other currencies. The legislation allows for the issuance of non-dollar stablecoins, which can expand the use of non-dollar currencies in international payments, settlements, and investment scenarios, accelerating the process of internationalization. In summary, the Hong Kong stablecoin legislation has profound implications for currency internationalization, but this process still requires ongoing attention to financial stability risks and timely optimization and adjustment of relevant policies. Chart 15: The Renminbi Has Room for Improvement in Global Foreign Exchange Reserves Source: IMF, Barry Eichengreen, CICC Research Department Risk Warning

1. Risks in the development of the cryptocurrency industry: The current regulation of the cryptocurrency industry is in its infancy, and there remains significant uncertainty in industry development. Potential risks include opacity of reserve assets, liquidity management risks, instability of algorithmic stablecoin values, money laundering and illegal financial activities, and insufficient consumer protection.

2. The impact of stablecoins on the traditional financial system exceeding expectations: The rapid development of the cryptocurrency industry may have an impact on the traditional financial system, affecting the business development of traditional financial institutions.

3. Slow advancement of regulatory policies: The current regulatory framework for stablecoins still needs improvement, and there is a time lag between the introduction and implementation of regulatory policies, with subsequent risks of policy advancement falling short of expectations.