Non-Dollar Stablecoins Emerge as Threat to USD Dominance

Stablecoins not directly tied to the US dollar are witnessing a surge in popularity in regions beyond the United States. This phenomenon is particularly noticeable in areas like Asia and Europe, which are fostering favorable environments for crypto enterprises through progressive regulations. Interestingly, even in China, where cryptocurrency is banned, there has emerged a usage case for a stablecoin backed by the offshore yuan. As the market share of stablecoins in non-dollar currencies continues to expand, US regulators may find that their dominance is challenged, potentially diminishing their regulatory influence.

Often termed the “killer use case” of crypto, stablecoins are employed not only as operational capital in decentralized finance (DeFi) but also for routine transactions across the globe. While the majority of stablecoins are currently dollar-denominated, this does not guarantee the dollar’s continued supremacy in the stablecoin sector. Policymakers in the US should recognize the risks posed to the dollar’s stronghold by the evolution of the digital financial landscape.

Numerous fintech players, including Wise, Airwallex, Checkout.com, and Stellar, have identified opportunities in offering services independent of the cumbersome and expensive Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. The private sector, both domestically and internationally, is constructing a novel financial framework designed to rival the dollar’s share in the market.

Internationally, stablecoins serve pivotal roles, such as delivering financial assistance to Ukrainian refugees, acting as a safeguard against local currencies in hyperinflation scenarios, and enabling swift and cost-effective remittances. Even in China, where cryptocurrencies are prohibited, fintech innovators are establishing stablecoin frameworks with Hong Kong to facilitate cross-border transactions for businesses operating overseas.

Stablecoins backed by the offshore yuan minimize barriers for small- to medium-sized importers seeking connections with Chinese suppliers, particularly from emerging markets. Research from Chainalysis indicates that merchants in regions like Sub-Saharan Africa and Latin America utilize cryptocurrencies for informal transactions with Chinese suppliers. Given China’s strict currency regulations, offshore yuan stablecoins have become increasingly appealing. The leading issuer of offshore yuan stablecoins cites that capital controls in Belt and Road countries prompt many foreign traders to resort to informal channels for their transactions, notwithstanding the heightened compliance risks.

The adoption of yuan-backed stablecoins has rapidly accelerated. Tron, a blockchain firm, revealed its yuan-backed TCNH stablecoin in December 2022, while CNHC, another entity backing yuan stablecoins, completed a $10 million funding round supported by US-affiliated firms like KuCoin, Circle, and IDG Capital. CNHC plans to operate on both Ethereum and Conflux. Conflux secured a $5 million investment from the Shanghai government in January 2021 and subsequently announced in September 2021 the upcoming launch of an offshore yuan-denominated stablecoin linked to the digital currency of the Chinese Reserve Bank (CBDC). Conflux collaborates with CNHC as a “Strategic Partner” to “jointly undertake the creation of new international payment pathways for offshore RMB.”

The rising allure of stablecoins in non-dollar denominations poses a threat to the longstanding dominance of the US dollar in the global finance arena. Yuan-backed stablecoins are swiftly emerging as credible alternatives to US dollar stablecoins, even within China, where cryptocurrencies face prohibition. As private sectors in the US and abroad continue to develop a new financial ecosystem, the likelihood of yuan-backed stablecoins challenging the dollar’s market position grows ever stronger.

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