Xiang Haotian: The Market Logic of Cryptocurrency, the Regulatory Dilemma of Stablecoins, and the Reconstruction of the Global Financial Ecosystem

Author: Journal of Economic Management

Overview of Perspectives:

Recently, the cryptocurrency market experienced a significant downturn, and the world's third-largest stablecoin, USDe, briefly lost its peg, sparking discussions about the risks of high leverage and liquidity vacuums in crypto assets. In response, Dr. Xiang Haotian, Associate Professor and PhD Supervisor at the Finance Department of Peking University's Guanghua School of Management, provided insights into the market logic and technical core of cryptocurrency issuance based on his cutting-edge academic research. His presentation covered the basic principles of decentralized accounting, the economic models of different types of cryptocurrencies, and the regulatory trade-offs faced by the currently popular stablecoins, as well as their relationship with the US dollar monetary system, providing a clear academic framework for understanding this complex field.

This article is based on the keynote speech delivered by Dr. Xiang Haotian at the 8th session of the Guanghua Scholars Salon at Peking University. (Dr. Xiang Haotian, Associate Professor at the Finance Department of Peking University's Guanghua School of Management)

I. The Rapid Development of China's Digital Economy Shows Vigorous Vitality and Infinite Potential

The current total market capitalization of the cryptocurrency market is approximately $3.7 trillion, with Bitcoin accounting for nearly 60%, holding an absolute dominant position, and Ethereum accounting for about 15%. Together, they form the core structure of the market. The third-ranked Tether (USDT), as the largest stablecoin, maintains price stability by pegging to the US dollar. From a technical perspective, the core of cryptocurrency transactions lies in achieving "decentralization" through distributed accounting, replacing the credit endorsement of a single centralized institution with multi-node consensus, thereby significantly increasing the difficulty and cost of data tampering, fundamentally differing from the traditional financial system based on bank credit. In terms of transactional applications, stablecoins represented by USDT and USDC, due to their dollar-pegging characteristics, have become the main circulating medium in actual transactions, with daily trading volumes far exceeding those of non-stablecoin cryptocurrencies. However, from a technical architecture standpoint, blockchain systems face a natural trade-off between "decentralization" and "efficiency": for example, Layer 1 networks (like Bitcoin) highly emphasize security and tamper-resistance but have limited processing capacity; this has led to the emergence of Layer 2 solutions, which attempt to enhance scalability while maintaining a trust foundation by processing transactions on a second layer and recording them on the main chain, becoming a key focus of technological evolution and capital investment in recent years.

In the issuance of uncollateralized tokens (such as Bitcoin and Ether), the key risk faced by holders is the "Dilution Effect." Each unit of newly issued tokens decreases the marginal utility of existing holders, thereby affecting the long-term value of the tokens. Professor Xiang stated that when private issuers lack external regulatory constraints, they generally adopt a supply strategy of "high initial issuance followed by gradual reduction." This behavior contrasts sharply with the optimal supply strategy of sovereign currencies, known as the Friedman Rule, which is driven by private issuers pursuing their own profits rather than maximizing social welfare.

Moreover, the "degree of decentralization" of token holdings directly affects the credibility of their pre-set supply strategies. Research shows that the more dispersed the distribution of holding addresses (as in Bitcoin), the more likely the issuance strategy is to approach the algorithmically preset rules, making it less susceptible to manipulation by a few large holders (Whales) or affected by consensus forks; conversely, a highly concentrated holding structure may increase the risk of arbitrary changes in supply, exacerbating market volatility and speculative behavior.

II. The Collateral Mechanism, Price Stability, and Regulatory Trade-offs of Stablecoins

Unlike uncollateralized tokens, stablecoins are supported by reserve assets as their underlying value, with the core goal of maintaining a stable exchange relationship between the coin's value and the pegged currency (such as the US dollar). Currently, mainstream stablecoins can be divided into two categories: one is the "partial reserve model" represented by USDT, which includes high-yield but highly volatile assets such as corporate bonds and cryptocurrencies in its asset pool, using over-collateralization to guard against potential redemption risks. The other is the "full reserve model" represented by USDC, whose reserve assets consist of low-risk cash and short-term government bonds.

Professor Xiang pointed out that for stablecoins under the partial reserve model, the issuer's capital adequacy ratio is a key factor in maintaining price stability. When the market experiences selling pressure, the issuer needs to use its own capital to repurchase tokens to support the coin's value; if the capital is insufficient, it may trigger a "de-peg" crisis. At the same time, the profit-maximizing motivation of private issuers may drive them to balance "asset risk - fee income": if regulation mandates that they only hold low-risk assets (such as the US "Genius Act"), private issuers may compensate for revenue losses by raising transaction fees or lowering interest rates on holdings, ultimately leading to a decline in user welfare.

This mechanism also resonates with the debate on "narrow banking" in bank regulation. Simply restricting the types of reserve assets can indeed reduce liquidity risks. However, if there is a lack of regulatory constraints on private issuers, it may also encourage issuers to raise fees to compensate for losses in reserve asset profits. Therefore, regulators need to seek a balance between "asset category restrictions" and "capital adequacy requirements" to achieve a balance between system stability and market vitality.

III. The Financial Ecological Impact of Cryptocurrencies and Future Challenges

The widespread application of cryptocurrencies has had a structural impact on the global financial system. In the fields of cross-border payments and asset circulation, stablecoins, with their 24-hour trading and high liquidity characteristics, have become important tools for bringing "real-world assets" (RWA) on-chain, such as tokenizing low-liquidity assets like bonds and real estate to enhance trading efficiency. However, currently, US dollar stablecoins dominate global virtual asset trading, even surpassing the dollar's share in global physical asset trading. Moreover, in some countries and regions, US dollar stablecoins are also beginning to be used for trading physical assets. Professor Xiang noted that, from the user's perspective, US dollar stablecoins have a direct substitutive relationship with the dollar itself. However, under the partial reserve model, US dollar stablecoins may also acquire new "risk-return" attributes by balancing between dollars and risk assets, reinforcing user demand for the dollar and further strengthening the dollar's dominant position in international settlements, posing challenges to the internationalization strategies of non-dollar currencies.

From a financial stability perspective, the rapid development of cryptocurrencies (especially stablecoins) may siphon off deposits from traditional commercial banks, alter the structure of capital allocation, and interfere with the transmission mechanism of monetary policy. Additionally, in capital-controlled economies, the openness and anonymity of public-chain cryptocurrencies may exacerbate the risk of capital outflows; thus, their development must be coordinated with domestic financial regulatory frameworks to achieve a balance between development and security.

In conclusion, Professor Xiang emphasized that the behavior of private institutions issuing tokens lacks alignment with social welfare goals, and while the "code as rule" commitment provided by blockchain technology can somewhat curb excessive issuance, it cannot fundamentally resolve the incentive distortion problem. In the future, how to encourage technological innovation while establishing a regulatory paradigm compatible with the development goals of the real economy will be a core issue faced by policymakers in various countries.

IV. Conclusion

The development of the cryptocurrency market presents a complex picture interwoven with technological drivers and financial logic. From the issuance strategies of uncollateralized tokens to the reserve mechanisms of stablecoins, it reflects the trade-offs market participants face between profit maximization and long-term stability. As regulatory frameworks in various countries gradually improve, cryptocurrencies will continue to play an important role in financial infrastructure, asset liquidity, and the international monetary landscape, and their integration and conflict with traditional systems will also warrant ongoing attention.