Yves here. This post focuses on the inherent contradiction in with stablecoin and digital currencies pegged to real world currencies: they either need to be fully backed by traditional currencies in order to be secure, which wrecks most of the profit potential for providers, be implicitly or explicitly backstopped by government, or face limits on use and periodic crises and “runs”. The US approach relies on regulation (good luck with that). China’s on the surface looks more robust but still fails to resolve the underlying conflicts.
By Eduardo Levy Yeyati, Plenary Professor of Economics and Public Policy Torcuato di Tella University and Sebastian Katz, Director, School of Economics, and Professor of Money, Credit and Banking and Economics University Of Buenos Aires. Originally published at VoxEU
Digital currencies pegged to fiat money face a built-in tension between credibility and competition, creating a ‘stablecoin paradox’. This column analyses the competing frameworks of the US and China to address the paradox. The US (under the GENIUS Act) combines strict reserve rules for privately issued, fully backed dollar stablecoins with market incentives that encourage expansion. Meanwhile, China’s approach centres on a central bank digital currency deployed domestically and extended across borders. Further expansion of the digital currency system will require backstop access, global coordination on regulation, limits on intermediation, and integration with payment systems.
Two years ago, we argued that digital currencies pegged to fiat money face a built-in tension: to keep credibility, they must operate like a currency board — holding fully liquid reserves to guarantee redemption at par — yet commercial incentives push them towards leverage and intermediation, undermining that very discipline. Because the latter seemed to be the ultimate goal of the former, we labelled this dilemma the ‘stablecoin paradox’ (Levy Yeyati and Katz 2022).
What was once theoretical is now a reality as the US and China escalate competition over global payments, monetary sovereignty, and the architecture of money itself.
The passage of the US GENIUS Act in July 2025, creating the first federal framework for stablecoins, and China’s rapid deployment of the e-CNY alongside its wholesale cross-border central bank digital currency (CBDC), mBridge, have brought the paradox to the heart of the international monetary system. The stakes are high: control over trillions in cross-border payments, the effectiveness of sanctions, and the balance of economic power in a digital world.
In this column, we argue that:
- The US approach tests the paradox at scale by combining strict reserve rules with market incentives that encourage expansion — and potential erosion — of discipline.
- China’s approach appears to sidestep the paradox through direct central bank issuance, but competitive pressures push it toward private yuan-pegged stablecoins that reintroduce the same tension.
- The global context — fragmented regulation, geopolitical rivalry, and the borderless nature of digital money — makes sustaining monetary discipline more difficult than in any previous era.
America’s Regulatory Gambit
The GENIUS Act requires stablecoins to maintain 100% backing in liquid, safe assets — US dollars, short-term Treasuries, repos, or insured demand deposits. In principle, this mirrors a currency board: full reserve coverage and strict convertibility at par (BIS 2025). The Act also creates a dual regulatory structure between federal agencies and states, and mandates technical capacity to freeze or burn tokens under lawful order.
The strategic intent is clear. Treasury Secretary Scott Bessent projects that the stablecoin market — now around $250 billion — could reach $2 trillion by 2028, vastly expanding global dollar use. Stablecoin issuers already hold over $140 billion in Treasury bills, making them, collectively, a larger holder of US debt than Germany (Ahmed and Aldasoro 2025).
Yet scale is the problem. As the market grows, issuers face pressure to generate higher returns, tempting them towards secondary money creation — using reserves to fund loans or longer-term investments — eroding the currency board discipline (Adrian and Mancini-Griffoli 2019).
History shows how fragile such discipline can be under stress. Argentina’s currency board collapsed in 2001 when capital flight forced reserve depletion; Hong Kong famously held its peg in 1998 only through costly interest rate spikes and coordinated asset purchases. In both cases, the credibility of ‘full backing’ depended on the ability to endure speculative pressure — something private stablecoin issuers, lacking central bank powers, cannot replicate.
The macro-financial consequences depend on where the inflows come from:
- If funds shift from government money market funds, the impact on Treasury yields may be minimal — merely reshuffling holders.
- If funds come from bank deposits, banks may face higher funding costs and reduced lending capacity, reshaping the credit channel of monetary policy.
This banking disintermediation — where money creation shifts from banks to stablecoin issuers holding only liquid assets — would move the system towards narrow banking. Such systems avoid credit risk but lack elasticity to respond to shocks – the core of the stablecoin paradox (Bank of England 2021).
Figure 1 Stablecoin market growth vs. US M2 and Treasury holdings, 2020-2025
Sources: CoinGecko global stablecoin data; industry press (AINvest, Yellow) for Treasury holdings; FRED (M2SL) for US M2. Market cap refers to all global stablecoins; ~97% are US dollar-pegged. Treasury holdings are combined USDT + USDC estimates from issuer attestations. M2 values are approximate annual averages in billions of US dollars. Shares of M2 are rounded and illustrative.
As the Financial Stability Board (FSB) has noted, “[s]ystemically important banks and other financial institutions are increasingly willing to undertake activities in, and gain exposures to, crypto-assets” (FSB 2022). Were these activities to depart from full-reserve models, they could reintroduce leverage or maturity transformation risks.
China’s Digital Yuan
Whereas the US strategy under the GENIUS Act relies on privately issued, fully backed dollar stablecoins, China’s approach centres on the e-CNY — a central bank digital currency (CBDC) — deployed domestically and extended across borders through mBridge.
China’s e-CNY is the most advanced central bank digital currency in the world, with over 260 million users and $7.3 trillion in cumulative transactions. Issued and backed directly by the People’s Bank of China, it avoids private-sector intermediation pressures — on paper.
Table 1 US versus China digital currency models
Its wholesale counterpart, mBridge, connects central banks from Hong Kong, Thailand, the UAE, and Saudi Arabia on a shared distributed ledger. By enabling near-instant atomic settlement of cross-border transactions in multiple currencies, mBridge removes the need for sequential account updates in correspondent banks — a key vulnerability of SWIFT. In practice, this means bypassing intermediaries that are often in jurisdictions able to block, delay, or monitor payments, a feature with clear geopolitical appeal.
The geopolitical goals are explicit. People’s Bank of China (PBoC) Governor Pan Gongsheng has framed central bank digital currencies as a way to safeguard against the ‘weaponisation’ of payment systems through sanctions. In parallel, China is promoting the yuan for trade settlement: Russia–China trade is now 92% settled in rubles or yuan, and CIPSprocesses $45.6 billion daily.
Yet, the paradox persists. While pushing the e-CNY central bank digital currency, China has opened the door to yuan-pegged private stablecoins from firms like JD.com and Ant Group. Officials worry that without competitive yuan stablecoins, cross-border payments will remain dominated by dollar stablecoins — a ‘strategic risk’ in the words of former Bank of China Vice President Wang Yongli.
This dual strategy — centralised central bank digital currency plus private stablecoins — recreates the currency board dilemma. To grow, private yuan stablecoins will face the same temptation toward intermediation and leverage as their dollar counterparts, potentially undermining their own stability and, by extension, monetary control.
The Geopolitical Stakes: Payments, Sovereignty, and Stability
The appeal of stablecoins is clear: instant cross-border settlement, 24/7 availability, and lower intermediary costs compared to the two- to five-day lags of correspondent banking (ECB, 2025). Cross-border stablecoin transactions now exceed $2.5 trillion annually, up tenfold since 2020.
This speed creates trade-offs:
- For advanced economies, widespread use of foreign stablecoins could weaken sanctions power (Brookings, 2025).
- For emerging markets, dollar stablecoins risk accelerating cryptoisation — digital dollarisation that erodes domestic monetary policy effectiveness (IMF 2025).
Adrian and Mancini-Griffoli (2019) warn that stablecoins crowd out local currencies where inflation is high and payment systems are inefficient, with the inclusion benefits of cheap remittances coming at the cost of policy autonomy. Nigeria’s eNaira experiment shows the challenges: uptake has been slow domestically, but cross-border stablecoin use by Nigerians abroad has grown, bypassing both the eNaira and the local banking system.
China’s Belt and Road projects are embedding e-CNY central bank digital currency rails into infrastructure from Southeast Asia to Africa, aiming to bypass Western banking. The US, via the GENIUS Act, is trying to extend the reach of dollar stablecoins. Both strategies increase cross-border connectivity — but also cross-border vulnerabilities.
Fragmented Regulation and the Risk of a ‘Race to the Bottom’
The GENIUS Act’s dual federal-state oversight enables regulatory arbitrage towards lenient jurisdictions like Wyoming.
Internationally, frameworks vary widely: Hong Kong’s rules differ from Singapore’s, the EU’s MiCA regime, and the UK’s upcoming standards. Such fragmentation invites a ‘race to the bottom’ on backing and disclosure requirements.
Market concentration amplifies these risks. Tether, with a 62% market share, operates under looser disclosure than federally regulated rivals. If a major issuer failed — whether through the loss of the peg, a run, or reserve impairment — spillovers could hit short-term funding markets through disorderly liquidation of Treasuries (Financial Stability Board 2022). The TerraUSD collapse in 2022, which wiped $400 billion from crypto markets, shows how quickly confidence can unravel when currency board discipline is breached (BIS 2022).
Even fiat-backed stablecoins fall short of central bank money’s singleness — the principle that all money in a system is interchangeable at par — because they lack direct access to central bank settlement (Garratt and Shin 2023). This was the flaw of 19th-century private banknotes, and it remains today.
Policy Implications: Sustaining Discipline in a Bborderless System
Despite their different architectures, both approaches face an identical challenge: how to scale a digital currency system while preserving the credibility of its backing. Competitive pressure pushes issuers — whether private or public-private hybrids — toward compromises that weaken discipline.
A few guiding principles emerge:
- Backstop access. Without access to central bank liquidity or deposit insurance, even fully backed stablecoins can face self-fulfilling runs (BIS 2025).
- Global coordination. Stablecoins are borderless; regulation is not. This reflects the financial trilemma between domestic financial stability, financial integration, and regulatory autonomy (Schoenmaker 2009): one cannot fully achieve all three. Avoiding regulatory arbitrage — and the potential for financial disruption — will require cross-jurisdictional standards on reserve quality, disclosure, and redemption rights.
- Limits on intermediation. To preserve currency board credibility, regulators must strictly limit leverage and related-party lending by stablecoin issuers, especially if bank-affiliated.
- Integration with payment systems. To achieve the benefits of digital innovation while preserving the solid foundation of existing systems and singleness, central banks could explore tokenised deposits backed by digital public money to preserve par convertibility without fragmenting the monetary base.
The Paradox Goes Global
The stablecoin paradox is no longer an abstract concept — it is the operating reality of a digital currency arms race between the world’s two largest economies. The US is testing whether strict reserves can survive market incentives for growth; China is testing whether centralisation can survive competitive pressures for private innovation. Both face the same structural trade-off: stability requires discipline, but growth demands elasticity.
In the analogue era, currency boards and hard pegs repeatedly failed under such pressure. The digital age offers new tools, but not an escape from monetary fundamentals. The winner may be whichever system can best resist the erosion of its own monetary discipline.
See original post for references
