At a closed seminar in July, former Governor Zhou Xiaochuan of the People’s Bank of China expressed concerns about the risks associated with stablecoins, as revealed in recently released notes from the think tank CF40.
Stablecoins: Overemphasized Necessity
Zhou Xiaochuan, 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. He noted that only a limited number of financial services can benefit from tokenization and decentralization. Therefore, he suggested that the actual demand should be objectively questioned.
Risks 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. Zhou warned that even in issuances backed by full reserves, stablecoins could create a multiplier effect through chain transactions, imposing burdens greater than what the reserves can cover.
China and Stablecoins: A Cautious Approach
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.
Zhou Xiaochuan's concerns about stablecoins highlight the importance of discussions and regulations in the evolving financial landscape, especially in light of new challenges to traditional financial systems.
