A recent opinion piece published in several Chinese outlets considers how China should respond to the proliferation of US dollar stablecoins. President Trump’s executive order on cryptocurrencies promoted the use of dollar stablecoins, not just domestically but worldwide. Europe has already raised concerns about monetary sovereignty, despite having limits on the usage of foreign currency stablecoins for everyday payments. Now it seems it’s China’s turn. One of its proposals is that China try stablecoins.
The Chinese article, “Digital currency reconstructs the international financial system”, was authored by Zhang Ming, the Deputy Director of the National Finance and Development Laboratory, the first economics think tank created in China, although there are now several.
He notes that US dollar stablecoins are already the dominant fiat currency for crypto trading as well as in decentralized finance (DeFi) for crypto-linked loans. Additionally, dollar stablecoins are sought after by residents in countries with weak currencies to act as a store of value.
“Once the US dollar stablecoin links the international credit of the US dollar with the application scenarios of the virtual world more closely, it may greatly consolidate the hegemony of the US dollar,” he wrote.
In response, he proposed a three pronged strategy.
Broaden the scope of CBDC
First off, he notes that China’s central bank digital currency (CBDC) is currently limited in scope. The digital RMB targets M0 or retail focused cash-like payments, rather than business to business or institutional use. He wants to see it expanding to M1 and M2, or to compete with all bank deposits.
While M0 was unquestionably the initial focus of the pilot CBDC, we’re not sure that it hasn’t already evolved. For example, we’ve reported on multiple B2B transactions, including cross border payments for oil and metals. We’ve also seen other reports regarding B2B usage domestically.
Additionally, Mr Zhang did not mention mBridge, the cross border CBDC initiative which certainly has an international focus. While the BIS was initially involved, it withdrew, saying that the project had graduated. However, there were concerns about mBridge involving sanctioned countries such as Russia.
Chinese stablecoins?
Next up is the potential for China to experiment with stablecoins. Mr Zhang talked about this as a green field opportunity.
However, we’d observe that it already is experimenting, using Hong Kong as a testing venue. Last year Hong Kong authorized several new cryptocurrency exchanges, including allowing retail access. Hong Kong’s Zhong An Bank (ZA Bank) was the first to provide retail cryptocurrency services in Asia, starting in November. Plus, Hong Kong launched a stablecoin sandbox a year ago, with Standard Chartered recently forming a stablecoin joint venture with Hong Kong Telecom and Animoca Brands.
However, Mr Zhang notes that China could expand its reach by launching “global application scenarios” with Chinese platforms. The most obvious is Ant and its subsidiaries Alipay and Ant International, which has extensive reach in Asia and worldwide. The company has been using blockchain extensively for many years, more recently for Ant Whale, a global cross border payment solution.
“Expanding the use of digital tokens on these platforms can significantly expand the international currency status of RMB, thereby more calmly responding to the challenges of US dollar stablecoins,” wrote Mr Zhang.
An electronic SDR
His third prong is to propose an electronic version of the IMF’s special drawing rights (SDR), which is a basket of the world’s most traded currencies, including the renminbi. However, today SDRs can only be held by central banks and multilateral financial institutions. This is not the first time that China has floated the idea of an e-SDR.
“The flourishing of various digital currencies is naturally better than the U.S. dollar monopolizing the development track of digital currencies. e-SDR can expand the use of supranational reserve currencies in the digital field,” Mr Zhang wrote.
There’s some irony in his e-SDR suggestion. There was a solution that could have addressed this specific concern about extending the dollar’s hegemony – the Facebook founded Libra stablecoin, which was initially designed to represent a basket of currencies (although not the renminbi). Instead, Libra spurred many central banks to start exploring digital currencies. And global regulators coordinated to block it. As they say, what goes around, comes around.
