Development Trajectory
The emergence of stablecoins has not been an overnight phenomenon. Since Satoshi Nakamoto proposed a peer-to-peer monetary system in 2008, the digital currency market, represented by Bitcoin (BTC), has evolved from a phase of unregulated wild growth to one of increasing maturity, eventually coming under U.S. regulatory oversight. While these developments are well known, the history of stablecoins already spans over a decade. However, due to the prohibition of cryptocurrency trading in China, there has been no domestic development of stablecoins.
In recent years, the digital renminbi (e-CNY) has become more familiar to the public. Like the Alipay ecosystem, it is a mobile payment system that still relies on traditional financial infrastructure, including deposit-taking and central bank settlement. In contrast, stablecoins utilize the same blockchain technology as Bitcoin. Similar to how physical banknotes contain unique identifiers recognized by printing machines, stablecoins are digital tokens encoded with unique blockchain hashes. Initially, stablecoins served mainly two purposes: as a medium for digital payments and as a bridge between the traditional payment system and Bitcoin.
With Circle’s public listing in the U.S., stablecoins have entered the regulatory spotlight. The U.S. has introduced a series of legislative measures such as the “Genesis” bill to support the development of digital currencies. Some scholars draw parallels with the evolution of the U.S. dollar—from the gold-backed dollar to the petrodollar, the chip dollar, and potentially a future “digital dollar.” It is evident that monetary power and technological advancement are deeply intertwined. Competing for technological dominance is tantamount to competing for monetary dominance. If the two decouple, economic development risks losing its trajectory.
Economic Theory
In 2020, Modern Monetary Theory (MMT) entered mainstream economic discourse.
At the time, public focus centered on MMT’s balance sheet approach to money creation and the notion that government deficits translate into household wealth. However, this is only one facet of the theory. MMT consolidates historical monetary theories to explore the essence of money itself. At its core, MMT posits: if something can be used to pay taxes, it should be considered legal tender; similarly, if wealth exists in a specific commodity form, that commodity may be treated as legal tender.
This framework provides a theoretical foundation for the evolution of stablecoins into a future legal currency. As stablecoins become a widespread store of value, once they are accepted for tax payments, they naturally evolve into legal tender. This rationale underpins the U.S. regulatory push to ensure a strict 1:1 peg between stablecoins and traditional fiat currency—creating a robust bridge between the conventional and digital monetary systems enhances payment efficiency across the board.
The regulatory framework for stablecoins aims to secure the future of the payment and settlement infrastructure. Issuers must maintain full USD reserves backing their stablecoins, in the form of either cash or U.S. Treasuries. These issuers thus resemble a hybrid of banknote printers and traditional commercial banks—capable of both custody and issuance. This business model mirrors currency board systems such as that of Hong Kong, where the structure has already proven mature. Notably, stablecoin redemption is only accessible via designated dealers rather than directly from issuers. This separation enhances compliance and systemic safety.
Implications for Monetary Policy
A traditional view holds that the effectiveness of monetary policy hinges on the banking system’s ability to create credit. Banks attract deposits, extend loans, and participate in the federal funds market. Central banks influence the broader economy by adjusting the federal funds rate, thereby transmitting policy signals through commercial banks. If deposit markets are disrupted, monetary policy transmission becomes impaired.
However, this view underestimates the scope of modern banking—especially within open economies. Contemporary banks source funds not only through deposits but also via bond issuance. As capital markets mature, banks operate under a universal banking model that encompasses both retail and investment banking functions.
While the growth of bond and equity markets has not diminished banks’ central role in monetary policy, it has raised the bar for transparency in central bank communication. Modern financial systems rely on this transparency, and MMT emphasizes the bond market as the central channel for policy signaling.
The federal funds rate is not the only effective policy tool. As with the historic development of equities and bonds, stablecoins can become part of the monetary transmission mechanism—provided their operations meet modern regulatory transparency standards. As commercial banks gradually participate in stablecoin businesses, the monetary system’s capacity for transmission will evolve, not collapse.
Just as monetary policy signals are conveyed through the federal funds rate and the bond market, stablecoins can become another conduit. Since stablecoin reserves are primarily composed of U.S. Treasuries, a sharp rise in the federal funds rate would drive down Treasury prices and, consequently, stablecoin asset values. This would slow the issuance and exchange of stablecoins, thereby dampening transaction velocity. Conversely, rate cuts would promote stablecoin activity. The logic of monetary tightening and easing remains unchanged—so long as the stablecoin framework is transparent and reserve compositions are clear, policy expectations will be effectively transmitted.
Commercial banks are the backbone of international settlement. If stablecoin custodial services become both profitable and compliant, banks will inevitably adopt them.
Outlook
At first glance, stablecoins appear to be merely an alternative payment method or an efficiency upgrade for international trade. However, the future of technology is always unpredictable.
Stablecoins are poised to transform the U.S. mobile payments landscape, creating a uniquely American digital transaction system. Since digital currencies, unlike fiat money, do not accrue interest, they function as digital equivalents of physical cash. Once stablecoins constitute a meaningful share of the monetary base—say, 5% of the national economy’s circulating capital—they will naturally enter the tax system. If the U.S. Treasury begins accepting stablecoins for tax payments, and itself uses them for expenditure, stablecoins will enter a hyper-growth phase.
The Treasury has little incentive to convert stablecoins into physical cash for tax purposes. Doing so would, under MMT, constitute monetary destruction—redeeming stablecoins for cash implies selling U.S. Treasuries, which is contractionary. If the Treasury accepts stablecoins directly, no such contraction occurs, and usage expands.
If stablecoins can be used for tax, could they also be used for financing? This is the concept behind Real World Asset tokenization (RWA). A company could issue equity and raise funds directly via stablecoins, giving them an investment yield characteristic. An investment banking system would naturally emerge—intermediaries would raise stablecoin funds for RWA equity investments, establishing a return benchmark for the stablecoin market.
Likewise, stablecoin holders could directly invest in RWA systems. Access rights to this system would be regulated by monetary authorities. This could lead to a unified global financial infrastructure where retail investors can participate in global assets simply by holding stablecoins—without the need for overseas brokerage accounts. The financing potential of such a system is immense.
A robust monetary financing system is the foundation of technological innovation. The pinnacle of currency is the pinnacle of technology. Stablecoins not only generate income from Treasuries for the U.S. but also catalyze the expansion of its direct financing market. On one hand, this increases Treasury revenues; on the other, it broadens the capital-raising universe—providing a powerful engine for economic growth. The entire system hinges on the Federal Reserve. As long as it maintains growth and price stability, the system will operate smoothly.
Although our analysis centers on the U.S. dollar, the framework applies globally. A successful stablecoin system depends on three key factors:
1. A transparent modern financial system
2. Stable economic growth
3. Price stability
This is not merely a regulatory issue—it is a competition of systemic architecture. From this perspective, Hong Kong’s economy lacks the stable growth foundation necessary for its stablecoin ecosystem. For Hong Kong stablecoins to succeed, they must be allowed to participate in a native RWA system. Only when Mainland Chinese equities are integrated into this system will Hong Kong stablecoins find their core function. If USD stablecoins are permitted to invest within regulatory sandboxes, legacy payment methods may become obsolete.