By Jinnan Ma
Last Friday, the People’s Bank of China, the central bank of the world's second largest economy, convened a meeting on cracking down on virtual currency trading and speculation, making it clear that “stablecoins are a form of virtual currency; at present, they are unable to effectively meet requirements in customer identification, anti-money laundering, and other areas, and there are risks of use in illegal activities such as money laundering, fundraising fraud, and unauthorized cross-border fund transfers.”
The central bank also reaffirmed that it would “continue to uphold the ban on virtual currencies and persistently crack down on illegal financial activities related to virtual currencies.” This marks the first official statement by the central bank to explicitly classify stablecoins as illegal and place them under strict regulation, signifying that China has further strengthened its risk-prevention approach in the governance of virtual currencies.
It is apparent that, in contrast to the legislative frameworks gradually introducing regulation seen in Europe and the United States, China—driven by considerations of financial sovereignty, capital controls, and social stability—chooses to eliminate the potential systemic risks from the very root by cutting off the circulation of virtual currencies. This stands in stark contrast to the “regulate and open to a limited extent” approach adopted by many developed countries in the West.
This divergence originates from differing definitions of the boundaries of financial security.
So, what exactly is a stablecoin?
Stablecoins are cryptocurrencies that are pegged to fiat currencies, commodities, or other assets, aiming to maintain price stability. Depending on the type of collateral backing them, stablecoins are generally categorized as fiat-collateralized (such as USDT, USDC), crypto-collateralized (such as DAI), and algorithmic (such as Ampleforth).
In theory, stablecoins leverage blockchain technology to enable “decentralized” value transfer: they are technologically neutral, facilitate cross-border payments, and offer high transparency. Since stablecoins are founded on cryptography and distributed ledgers—and don’t rely on a single institution—they are resistant to censorship and possess high liquidity. In practice, many people use stablecoins for their efficiency and convenience in cross-border remittances, asset preservation, and decentralized finance. Particularly in regions with sharp currency fluctuations, stablecoins provide individuals with a tool to hedge against the risk of local currency depreciation.
However, there is a fundamental tension that may be impossible to resolve—namely, the inherent contradiction between the anonymity of blockchain and the requirements of anti-money laundering.
Although blockchain transaction records are public, the mapping between addresses and real identities is often unclear. Criminals can further hide the flow of funds through services like coin mixers and crypto-to-crypto exchanges. While stablecoin issuers can establish KYC (Know Your Customer) and AML (Anti-Money Laundering) systems, doing so requires substantial resources and regular reserve asset audits, which pose a significant burden for small and medium-sized institutions. Additionally, since global regulatory standards are not yet unified, compliance costs for operators remain high.
Blockchain is inherently cross-border, which means that regulators in a single country find it difficult to track and monitor activity. This requires international coordination mechanisms, but in reality, regulatory progress varies greatly from country to country. Even if transactions are technically traceable, delays in law enforcement cooperation still leave loopholes for the movement of illicit funds.
Although, in theory, stablecoins can be redeemed at any time, differences in the liquidity of reserve assets may lead to risks similar to a "bank run." If a large number of holders attempt to redeem at once, the reserves may not be readily liquidated. Some stablecoins are even created using algorithmic or collateralized mechanisms, potentially introducing leverage and thereby amplifying underlying risks.
Many financial professionals have pointed out that the decentralized design of stablecoins could threaten financial stability. If stablecoins see widespread adoption for payments or as stores of value, they could undermine the effectiveness of monetary policy transmission and even give rise to parallel currency systems. This issue is particularly salient in tightly regulated economies like China, where stablecoins may become tools for evading foreign exchange controls, exacerbating risks of capital flight.
In March 2025, the Shanghai Pudong New Area People’s Court issued a verdict in a case involving illegal currency exchange using stablecoins. The ringleaders, Yang and Xu, operated 17 shell companies and conducted 6.5 billion yuan in illegal exchanges over three years. The operation worked by “receiving RMB domestically and paying out foreign currency overseas,” using stablecoins like USDT to settle transactions. The general process involved converting illicit proceeds into stablecoins (such as USDT), transferring funds through multiple exchanges and coin-mixing services to obscure the origin, and finally exchanging them for fiat currency or investing in “legitimate” projects overseas. This circumvented the traditional banking and foreign exchange regulatory systems, significantly increasing the difficulty of tracing fund flows.
If Chinese residents use overseas exchanges to convert RMB into stablecoins (like USDT) and then exchange those for foreign currency abroad, it essentially creates an “underground banking” system for cross-border transfers—thus evading foreign exchange controls and tax obligations. Stablecoins effectively provide a workaround for capital controls. If this practice spreads, large-scale capital outflows could impact a country’s monetary policy and financial stability.
In recent years, while initial coin offerings (ICOs) and initial exchange offerings (IEOs) have nearly disappeared, stablecoins as a new innovation have become a new channel for fundraising scams. Criminals issue fraudulent stablecoins, promise high returns or steady profits, and then abscond with investors’ money. In August 2025, an app called “China Stablecoin” lured tens of thousands of investors by claiming to be a “national strategic project” or “central bank digital currency pilot,” ultimately defrauding them of their funds.
For this reason, as early as September 2025—four years ago—the People’s Bank of China and nine other regulatory agencies jointly issued the “Notice on Further Preventing and Resolving Risks of Virtual Currency Trading and Speculation.” Although the notice at that time did not explicitly use the term “stablecoin,” it clearly listed Tether (a typical example of a stablecoin) as a virtual currency and emphasized its associated risks. The recent meeting held by the central bank essentially reaffirms this policy stance.
By examining the content of both meetings and the issued notices, we can gain insights into the regulatory logic guiding these authorities.
The primary focus lies in safeguarding monetary sovereignty. Regulators believe that stablecoins may challenge the central bank's authority over currency issuance, especially in the context of the cross-border expansion of stablecoins. There is also the need to maintain financial stability by preventing stablecoins from forming a competitive relationship with fiat currencies, which could trigger risks of currency substitution. Additionally, this approach serves to avoid U.S. long-arm jurisdiction, since stablecoins can be a tool for advancing the internationalization of the U.S. dollar. For China, this makes it all the more important to guard against the transmission of external financial risks.
As a result, we observe thatthe Chinese government has implementedthe world’s moststringent regulatory policies in the virtual currency sector.
All institutions and individuals are strictly prohibited from participating in virtual currency trading and speculation. Virtual currency exchanges and initial coin offering (ICO) activities have been shut down, and advertising as well as financial services related to virtual currencies are heavily regulated. At the same time, regulatory authorities are stepping up the monitoring of fund flows involving both banks and non-bank payment institutions. If any movement of funds related to virtual currencies is detected, harsh measures are typically taken, such as freezing accounts or launching investigations.
When it comes to virtual currencies, especially stablecoins, China and Western countries have taken completely different regulatory approaches. The U.S. and Europe tend to recognize the legitimacy of stablecoins, provided the risks are under control, and are working to integrate them into existing financial regulatory frameworks.
In July 2025, U.S. President Trump signed the GENIUS Act (Guiding and Empowering American Innovation and User Security), which provides a clear legal framework for the issuance and trading of stablecoins.
The core of this framework is known as the "Four Key Measures." The first measure is licensing, which requires stablecoin issuers to obtain a federal license from the Office of the Comptroller of the Currency (OCC), or to comply with state-level regulatory requirements. The second measure is enhanced auditing, compelling issuers to ensure their reserve assets are safe and highly liquid, and to undergo quarterly audits. The third measure centers on consumer protection, establishing clear mechanisms to safeguard user rights, including redemption rights and information disclosure. The fourth measure is "building barriers," which restricts foreign entities from promoting stablecoins in the United States, thereby maintaining the dominance of the US dollar.
This regulatory approach reflects the US’s dual intent: to encourage innovation on one hand, and, on the other, to protect consumers, ensure financial stability, and contain systemic risk. At the same time, it aims to leverage stablecoins to consolidate the global dominance of the US dollar and promote the worldwide adoption of "US dollar stablecoins."
The European Union's regulatory strategy is actually quite similar to that of the United States.
The Markets in Crypto-Assets Regulation (MiCA), which officially took effect on July 2, 2024, established a clear regulatory framework for stablecoins for the first time. Under MiCA, stablecoin issuers are required to obtain operation licenses within the EU and continuously meet standards regarding capital adequacy, governance structure, and internal controls.
To ensure the security of users’ assets, reserve assets must be strictly segregated from the issuers’ own assets, shielding them from creditor claims in the event of issuer bankruptcy. Issuers are also required to regularly disclose audited reports on reserve assets to ensure operational transparency. Furthermore, MiCA introduces a "passporting" mechanism, enabling compliant stablecoins to circulate freely throughout the EU, thereby laying the institutional foundation for cross-border financial integration.
Hong Kong is keeping pace. On August 1, 2025, Hong Kong’s Stablecoin Regulation will take effect, requiring retail stablecoin issuers to obtain appropriate licenses and fulfill information disclosure and audit obligations. On the same day, the Hong Kong Monetary Authority (HKMA) will release the "Guideline for Licensed Stablecoin Issuers," which will further detail the operational requirements.
The Hong Kong government’s approach to stablecoin regulation is somewhat innovative. For example, in addition to the licensing regime, it introduces a "sandbox regulation" mechanism that allows eligible issuers to test new stablecoin products in a controlled environment—seeking to strike a careful balance between innovation and risk. At the same time, Hong Kong places particular emphasis on aligning with international standards and advancing the interoperability of Hong Kong dollar stablecoins with multiple cross-border payment systems. The HKMA has also launched a trial of the “e-HKD,” or digital Hong Kong dollar, with the aim of exploring the use of central bank digital currency (CBDC) for cross-border payments.
Developed economiessuch as those in Europe and North Americaare actively exploring and building regulatory frameworks for stablecoins. While these frameworks demonstrate notable advantages, they also come with a range of significant challenges.
From the perspective of advantages, the key lies in balancing financial innovation with market security. By establishing a licensing system, regulatory authorities provide compliant stablecoin projects with a clear legal status and development path. This approach encourages technological innovation, while strict entry requirements and ongoing supervision effectively safeguard consumers’ funds and data security. In addition, this model helps enhance the international competitiveness of sovereign currencies. Clear regulatory rules provide credibility for digital assets pegged to sovereign fiat currencies as they expand globally, further consolidating their dominant position in the international financial system. Moreover, the regulatory framework emphasizes the transparency of reserve assets. By mandating that issuers conduct regular, independent third-party audits and disclose the composition and custody status of reserve assets, it greatly reduces the risk of depegging and credit crises resulting from "no reserves" or "low reserves". Another highlight is the internalization of compliance costs: regulation turns the previously uncertain and voluntarily borne risk of compliance by market participants into explicit, mandatory requirements. This ensures industry-wide transparency in operational costs and risks, helps weed out non-compliant and low-quality projects, and improves the overall health of the industry.
However, the stablecoin regulatory model in Europe and North America also faces significant challenges that cannot be ignored.
The implementation of regulation brings with it high compliance costs, which may dampen overall market vitality. Ongoing audit, legal compliance, and technical security requirements significantly increase the operational burden on issuers, and these burdens are especially heavy for small and medium-sized enterprises with limited resources. Over time, this could even stifle grassroots innovation and lead to market concentration among a handful of well-capitalized giants.
On top of this, the cross-border nature of stablecoins presents an inherent conflict with the territorial nature of regulation. Differences in regulatory philosophies, legal systems, and risk preferences among countries make it extremely challenging to establish unified global regulatory standards. This fragmentation not only hinders the seamless integration of the global stablecoin market but also creates opportunities for "regulatory arbitrage"—issuers may opt to operate in regions with the least stringent rules, thus triggering new risks.
Even if the aforementioned operational and coordination issues are resolved, a deeper systemic risk remains unresolved. Although regulatory oversight aims to reduce individual risks, large-scale stablecoins inherently perform a banking-like maturity transformation function. Under extreme market stress, the risk of massive runs has not been eliminated—the rapid liquidation of reserve assets could trigger a liquidity crisis, which could propagate through financial networks and pose a threat to the entire financial system.
In stark contrast to the nuanced regulatory approaches in Europe and the US—which seek a careful balance between innovation and risk—China has adopted a prohibition model, meaning a complete ban on stablecoin issuance and trading. Which approach is superior?
The core strength of this model lies in its capacity for proactive risk management. By blocking stablecoin circulation at the source, China can effectively avoid a series of financial crimes such as money laundering and illicit financing that stablecoins might facilitate, building a robust firewall to safeguard national financial stability.
On top of that, this strategy strongly ensures national monetary sovereignty, preventing any form of private digital currency from eroding the central bank's monetary issuance rights, and guaranteeing the renminbi’s absolute dominance within the domestic monetary system. At the same time, it serves as a shield against external financial pressures, effectively circumventing extraterritorial jurisdiction and financial sanctions that countries like the United States might impose through USD-pegged stablecoins. With clear and unambiguous rules, the prohibition model also enables highly efficient law enforcement, avoids regulatory gray areas, and significantly lowers the overall social cost of regulation and enforcement.
However, this across-the-board blanket prohibitionapproach is not without its costs, and its limitations are equally apparent.
The most direct consequence is the suppression of fintech innovation, which might cause China to miss out on early opportunities in blockchain-based cross-border payments and digital finance. The constraint on innovation stifles genuine market demand.
Enterprises, especially those operating internationally, still have strong needs for efficient and low-cost cross-border payment solutions. When legitimate channels are cut off, some of this demand may be forced into unregulated gray areas, leading to new and even harder-to-monitor cat-and-mouse gamerisks.
Looking globally, as most economies are actively exploring regulatory frameworks for stablecoins and integrating them into the formal financial system, China’s prohibitive stance could leave it facing challenges in international financial cooperation. Domestic companies may also encounter greater inconvenience and barriers as they participate in global financial activities.
