The announcement of the possible issuance of a yuan-based stablecoin suggests that Beijing is considering a new step towards detaching itself from the US-controlled monetary system to establish its own currency as a global asset by Andrea Monti – Initially published in Italian by Formiche.net
According to an exclusive report by Reuters, China is considering allowing the creation of a stablecoin whose value would be guaranteed by the yuan to increase the volume of transactions that do not use the US dollar as the reference currency.
This news suggests the opening of a new battlefront in the low-intensity but no less fierce conflict between the two powers.
The internationalisation of the yuan through stablecoins
Currently, the US controls virtually the entire stablecoin market, and the yuan is far from becoming a global fiat currency. It would therefore come as no surprise if one of the reasons that prompted the Chinese government to consider this option was precisely the ambition to indirectly raise the “reputational” status of its currency.
Removing US state control over stablecoin issuers
Turning to more substantive issues, the advantages of a stablecoin are such if issuers operate in a regulated market, where state authorities can verify compliance with guarantees, for example, in the management of reserves that support the value of this payment instrument. Despite the fact that the yuan (and also the rouble) are regularly used in transactions with stablecoins, it is clear that if the aim is to increase their number in terms of frequency and amounts, China would not risk leaving control over the issuer to another state, with which, moreover, relations are somewhat tense.
The creation of economic flows towards non-US destinations
If the stablecoin project were to succeed, it should also be considered that it could fuel a flow of bank deposits to China from private and public capital that might find it convenient not to be subject to US jurisdiction. A phenomenon similar to what has been hypothesised, mutatis mutandis, for the attractiveness of US stablecoins to the detriment of the European Union.
Possible critical issues of the project
It is obviously too early to assess the feasibility of the yuan-based stablecoin project, especially considering factors that are beyond the control of the Chinese government. This is particularly true for operational risk management, which requires consideration of a number of factors.
One such element is the level of effectiveness of judicial remedies in the event of bankruptcy or other negative events that may affect the issuer. If Chinese laws and courts do not provide adequate guarantees — or are not perceived as sufficient — it is unlikely that the market would take on the risk of lengthy legal proceedings with uncertain outcomes.
A similar problem concerns the need for clarity on cases of freezing, by the Chinese authorities, of the funds that guarantee the stablecoin.
Finally, consideration must be given to the political reactions of the US and the European Union, and the economic reactions of the financial sector, which could be aimed at blocking the arrival of a competitor from the outset.
The existential challenge
In a context where competition between powers also plays out in terms of the monetary system’s dependence on infrastructure and information technology, the possible emergence of a yuan stablecoin would be less a technical issue and more a political one.
It is true that such an infrastructure would very quickly become a target for criminal groups, state-sponsored organisations or clandestine actions by institutional structures. But this would not be anything new, given that such actions have become the norm in various sectors.
Rather, the fate of the project would depend on the confidence that the issuer — and indirectly the Chinese government — would be able to convey to global markets both in relation to the instrument and, above all, to the institutions called upon to guarantee its stability and predictability. Without these prerequisites, any promise of discontinuity with respect to the dominance of the dollar would remain confined to the realm of intentions.