China’s ex-banker dismisses stablecoins: “We have better system”

During a closed event organized by the China Finance 40 Forum in Beijing, former central bank governor Zhou Xiaochuan expressed concerns about stablecoins. He said stablecoin payment services have shortcomings, while their benefits are often exaggerated. 

China’s payment system is already efficient, says Xiaochuan 

Speaking about the use cases of stablecoins, former People’s Bank of China governor Zhou Xiaochuan said the two most common applications are cross-border payments and remittances. However, he argued that these benefits are often overstated. “Some claims that traditional cross-border payment systems are technically ‘very expensive’ may be exaggerated,” Xiaochuan noted.

Xiaochuan noted that in countries like the US, where retail payments still rely heavily on credit cards, there is room to cut costs and generate profits. But in China, the payment system is already highly efficient, leaving little space for new entrants to reduce costs or make profits.

In China, the existing retail payment system, including third-party payment platforms, central bank digital currencies (CBDCs), soft and hard wallets, and clearing infrastructure, has not adopted a decentralized and tokenized approach.

Stablecoin risks for central banks and financial stability 

According to Zhou Xiaochuan, stablecoins present two main concerns for central banks: over-issuance, where stablecoins are issued without full reserve backing, and high leverage, where post-issuance operations like lending, collateralization, and trading amplify the impact of issued coins. Even fully backed reserves may not be enough to cover potential run volumes.

Discussing the US GENIUS Act and Hong Kong's Stablecoin Ordinance, Xiaochuan said that while these regulations partially address the risks, control remains limited. One major challenge is custodian accountability, with past cases showing custodians sometimes failing to meet obligations. He also warned about the multiplier effect of stablecoins. Even if each coin is fully backed, using them for lending, trading, or as collateral can make their impact much larger than the actual reserves. 

If authorities don't carefully track how the coins are used, this can increase the risk of fraud, market manipulation, and financial instability, as large amounts could be misused or quickly withdrawn.

Xiaochuan believes that the mixed use of multiple currencies, or hybrid currencies, where several currencies are used at the same time in a single system, can make oversight more difficult and increase the risk of fraud or market manipulation.

Related article: 3 things Goldman Sachs wants you to know about the stablecoins

China reconsiders yuan-backed stablecoins amid policy shift

For years, China has banned private cryptocurrencies, including stablecoins, to protect financial stability and control capital flows. But this policy is now changing. A Reuters report on August 20 says the State Council is considering a plan to allow and regulate yuan-backed stablecoins for the first time. The plan would focus on a tightly controlled offshore stablecoin for cross-border trade, catching up with U.S. stablecoin adoption. The goal is to increase the global use of the yuan while maintaining strict domestic capital controls. 

The proposal is still under discussion, and critics like Xiaochuan warn that stablecoins carry risks that must be addressed. He emphasized that scholars, researchers, and practitioners should carefully study stablecoins’ functions and implementation, avoiding one-sided views while analyzing all key aspects to better understand market trends.