Xiao Feng's latest speech: Stablecoins are a new stage in the evolution of currency

I. The Significance of Stablecoins

(1) The Technological Value of Distributed Ledger

To truly understand stablecoins, one must first outline their development background. Stablecoins are built on the foundation of distributed ledger technology. Distributed ledger technology represents the third iteration of human computational methods over thousands of years. The first was single-entry bookkeeping. From the clay tablets discovered in the Sumer region, it is evident that single-entry bookkeeping was used, recording only income and expenses.

Around the year 1300, Italy saw the emergence of double-entry bookkeeping, which not only recorded income and expenses but also assets and liabilities. For over 700 years thereafter, computational methods were optimized but no new iterations emerged.

It was not until the emergence of the Bitcoin blockchain in 2009 that a new computational method, namely distributed ledger technology, was introduced. The biggest difference between distributed ledger technology and previous bookkeeping methods is that the latter involved each party maintaining their own records, akin to private ledgers. For instance, a remittance from Beijing to New York involves multiple institutions, requiring alignment of all information from their private ledgers, which incurs time and costs. However, a distributed ledger acts as a public ledger where all participants record transactions on the same ledger, eliminating the need for multiple institutions to align information, allowing for direct peer-to-peer payments. This is the most significant difference between the two computational methods.

After the emergence of the Bitcoin blockchain, stablecoins began to appear in 2014. As distributed ledger technology underwent continuous engineering experiments, maturation, and optimization, two trends emerged: on one hand, since 2009, people have "created from nothing" Bitcoin, Ethereum, and others, referred to as "digital natives." On the other hand, since 2014, stablecoins represented by USDT have emerged, marking the emergence of another trend, namely "digital twins." A digital twin refers to an asset that already exists in the real world, such as the US dollar, being brought onto the blockchain for tokenization, effectively mapping existing assets onto the chain through digitization.

Simultaneously, with the approval of Bitcoin ETFs in the US and Hong Kong last year, a new phenomenon emerged: digital native assets transitioning from on-chain to off-chain. Bitcoin ETFs are listed on the New York Stock Exchange (NYSE) and the Hong Kong Stock Exchange (HKEX), allowing investors to invest and trade them according to stock trading mechanisms. Bitcoin itself exists on-chain, while Bitcoin ETFs exist off-chain. Therefore, this process involves the conversion between on-chain and off-chain, as well as the interaction between digital twins and digital natives.

In the past decade of practice with distributed ledger technology, if viewed as a social engineering experiment, one can observe the changes and gradually prove the value of these technologies.

(2) As a New Financial Market Infrastructure

Since 2009, significant changes have occurred in financial market infrastructure based on distributed ledger technology, resulting from the transformation of distributed bookkeeping. Financial market infrastructure primarily includes a series of mechanisms such as payment, trading, clearing, and settlement. So what is new about the new mechanisms compared to the old ones? What characteristics do the old and new mechanisms each possess?

Currently, the financial infrastructure we rely on employs a model of central registration, central custody, central counterparty trading, and central settlement, requiring collaboration from at least three institutions to complete the clearing and settlement of a transaction. However, on a distributed ledger, since all participants record transactions on the same ledger, the trading model shifts to peer-to-peer transactions, allowing any two individuals to complete transactions directly without intermediary steps.

The existing financial market infrastructure uses net settlement, while the settlement model on a distributed ledger is per transaction. This means that once a transaction is confirmed, the settlement is completed immediately, with both parties fulfilling their obligations. In the stock market, for example, the NYSE will introduce a 5×23 hour trading model by the end of this year, reserving one hour after trading hours for clearing; meanwhile, NASDAQ plans to launch a 5×24 hour trading model in the future, but it cannot achieve this goal within this year due to the need for a pause during trading for clearing under the old financial infrastructure. In contrast, Hong Kong's virtual currency exchanges have already achieved 7×24 hour trading without holidays, precisely because their ledger types differ, leading to different financial market infrastructures. This is also one of the backgrounds for stablecoins, as they are built on a new financial market infrastructure.

II. Asset Tokenization (RWA)

(1) What is Asset Tokenization?

In the author's view, asset tokenization actually originated from USDT, referring to the process of bringing real-world assets onto the blockchain and tokenizing them. Its development has gone through three stages:

The first stage is the emergence of USDT, which occurred in 2015. The ten years of practice and social experimentation since 2015 have shown that the tokenization of fiat currencies has immense value, not only in the payment and settlement field but also in other aspects, which will be elaborated on later. Against this backdrop, countries have begun to legislate to regulate and further promote it under licensing and regulatory frameworks. According to various statistics for 2024, the trading volume based on US dollar stablecoins is at least $16 trillion, with higher estimates reaching $28 trillion. Whether it is $16 trillion or $28 trillion, it indicates that the application of stablecoins based on distributed ledgers and blockchain has become a widely used "killer application." The largest user group consists of unbanked individuals in Africa, who use USDT and USDC for cross-border payments.

The second stage began last year, with firms like BlackRock and Fidelity launching tokenized fund products in the US, such as US Treasury bond funds and dollar-denominated asset funds. These funds have been tokenized and brought onto the blockchain, initiating the process of financial asset tokenization.

The third stage involves the tokenization of physical assets, such as real estate and hotel assets. This stage is still in the exploratory phase and is expected to gradually advance starting this year, with several billion dollars' worth of physical asset tokenization practices already underway.

These three stages are arranged in order of increasing complexity. The tokenization of fiat currencies is relatively easy because it does not require reliance on other means for credit endorsement. Fiat currencies like the US dollar and the Chinese yuan are backed by national laws, which gives them a high level of market trust, making the tokenization process simpler. Financial asset tokenization is relatively more complex, but still easier than physical asset tokenization, as the issuers and custodians are usually regulated licensed financial institutions, with custody primarily handled by banks. People trust these strictly regulated licensed financial institutions, making their tokenization more readily accepted.

The most significant difference before and after tokenization is that once an asset is minted into a token on the chain, it is detached from the banking system, leaving both the bank account system and the SWIFT system, transforming into a decentralized form. Therefore, whether tokens exist on the chain and whether they exist permanently must rely on strictly regulated financial institutions (custodian banks) to ensure. Tokens are generated based on instructions issued by the custodian bank; for example, after the custodian bank confirms receipt of a client's $100,000, it mints $100,000 worth of tokens (such as a US dollar stablecoin). This instruction is only recognized if issued by the custodian bank, making this process relatively straightforward.

However, there is currently no mature solution for the tokenization of physical assets. The main issues lie in how to put information on-chain, establish ownership, and ensure a strong binding between on-chain information and off-chain physical assets, as the two can easily become decoupled. For instance, in the case of real estate, property information needs to be put on-chain, which requires cooperation from multiple parties, such as property management departments, but this issue has not been well resolved.

In the blockchain industry, there exists a potential solution known as DePin (Decentralized Physical Network), which theoretically allows each block to collect data on-chain to ensure the real existence of assets and validate them through on-chain verification. For example, charging stations can install blockchain communication modules to directly upload data such as usage duration, charging volume, and income to the chain. However, this pathway currently lacks technological maturity and incurs high costs, leading to relatively few physical asset tokenization practices. Development is expected to begin around 2025.

(2) The Significance of Asset Tokenization

Some argue that the necessity of tokenization raises the question of what makes it special for traditional currencies like the RMB or USD. The necessity of tokenization lies in:

1. Enhancing Global Liquidity of Assets

When assets are minted as tokens on a public chain, global investors can easily access them, thereby granting the asset global liquidity. This is akin to incorporating it into a global liquidity pool. For example, purchasing stocks on the Hong Kong Stock Exchange is a complex process for Brazilian investors, requiring them to open an account in Hong Kong and convert currency into Hong Kong dollars before trading. However, on the blockchain, these cumbersome procedures are eliminated, as it removes traditional mechanisms like central registration and custody, enabling peer-to-peer transactions. Investors can independently search for information and decide whether to purchase, greatly enhancing the accessibility and convenience of asset transactions.

2. New Clearing and Settlement Models

Tokenization brings about a peer-to-peer clearing and settlement model with fewer steps, higher efficiency, and lower costs. Preliminary statistics indicate that traditional banks have a capital turnover rate of about 7 to 8 times a year, while decentralized finance (DeFi) collateralized lending can achieve a turnover rate of up to 67 times a year, nearly ten times that of traditional banks. The fastest case of completing a loan on the blockchain takes just 10 seconds, including lending, repayment, and interest settlement, a model known as "flash loans." "Flash loans" are achieved through over-collateralization rather than leveraged lending, with the interest for USDT lending on-chain being 8%. This high interest arises from the significant increase in capital turnover frequency rather than through leveraging returns. Therefore, tokenization not only improves capital turnover efficiency but also reduces risk without the need for leverage.

3. Programmability

Traditional currencies (like the RMB and USD) are not programmable, while tokenized currencies can be programmed through smart contracts. This feature has been widely applied in smart contracts for clearing and settlement and default handling, significantly improving efficiency. For example, in on-chain lending, once default conditions are triggered, smart contracts automatically execute settlements without the need for accountants, banks, or courts to intervene. This process can be completed in just a few seconds, while traditional financial markets require numerous intermediaries and considerable time to handle defaults.

4. Preparing for the Future AGI Era

With the arrival of the Artificial General Intelligence (AGI) era, machines will independently create economic value, necessitating payments and settlements between machines. In this scenario, transactions between machines cannot rely on traditional payment methods but must be completed through smart contracts and programmable currencies. If fiat currencies wish to maintain their importance and value in the AGI era, they must possess programmability. Therefore, tokenization is not only a current financial innovation necessity but also an inevitable choice for future technological development.

III. The Monetary Attributes of Stablecoins

The attributes of currency have undergone three iterations: first, early currencies had natural attributes, whether shells, gold, silver, or copper, all derived from nature, with people attributing currency attributes to them. Second, with the emergence of sovereign states, fiat currencies like the RMB, USD, and GBP were born, endowing currency with legal attributes. Third, the emergence of digital currencies like Bitcoin, based on cryptography, distributed ledgers, digital wallets, and smart contracts, constitutes the technical attributes of currency, gaining global consensus. Based on this consensus, Bitcoin's total market value has reached over $2 trillion.

Stablecoins possess dual attributes: on one hand, fiat currencies are legally mandated currencies used by people. On the other hand, when fiat currencies are converted into stablecoins, they acquire technical attributes, operating on distributed ledgers and relying on technologies such as cryptography, distributed ledgers, digital wallets, or smart contracts during issuance, minting, and operation. From this perspective, stablecoins can be seen as the tokenization of fiat currencies, representing a superior form of currency created by humanity.

Analyzing from the perspective of currency attributes, stablecoins possess functions such as payment and settlement. In addition, stablecoins not only have technical attributes like programmability but also serve as currencies that transcend time and space. Once currency is converted into a stablecoin and operates on the chain, it transcends spatial limitations and judicial jurisdiction restrictions. For instance, in Africa, where over 60% of the population lacks bank accounts and cannot access currencies like the US dollar through banks, individuals can conveniently purchase US dollar stablecoins on-chain using mobile wallets. Furthermore, stablecoins are high-velocity currencies, with their circulation constrained by smart contracts on the chain, achieving higher efficiency than traditional currency circulation. Lastly, they represent democratized currency. Specifically:

(1) Exploring Stablecoins from the Perspective of Reserve Assets

Stablecoins manage asset reserves similarly to money market funds. When a stablecoin issuer receives customer dollars, they deposit them into a custodian bank, which issues instructions to the issuer, such as confirming receipt of $100,000 from a client, after which the issuer mints $100,000 worth of stablecoins on the chain. The underlying assets of stablecoins are fiat currencies, which do not circulate directly but flow through tokens, managed in a manner consistent with money market funds. Some express concerns about whether this involves currency creation, but in reality, there is no currency creation. The fiat currency merely remains in place, and the issued currency does not involve leverage or currency storage, resulting in relatively minor disturbances to financial stability. Stablecoins circulate rapidly across time and space in token form, replacing leverage. The absence of currency storage is due to the increased efficiency of capital turnover; for example, "flash loans" can complete lending and repayment within 10 seconds.

From the perspective of reserve assets, stablecoins effectively address the "last mile" issue in inclusive finance. Inclusive finance requires easy access to financial services; without a financial account, inclusive finance cannot be discussed. Stablecoins are widely adopted in Africa, albeit with low amounts. For instance, in Kenya, where 60% of the population lacks bank accounts, a payment method based on mobile numbers has developed, becoming a classic case of inclusive finance. Now, Kenyans can not only send SMS payments to telecom operators via mobile wallets but also more conveniently access US dollar stablecoins on-chain compared to traditional bank account systems.

(2) Analyzing Stablecoins from the Perspective of Facilitating Cross-Border Payments

Once holders acquire US dollar stablecoins, they gain cross-border payment capabilities, representing a significant advancement for inclusive finance and greatly increasing access to financial services. As a result, unbanked individuals in Africa can obtain global payment possibilities through mobile wallets, making Chinese cross-border e-commerce the biggest beneficiary. Research in Yiwu found that local exporters have begun accepting US dollar stablecoins. When Chinese cross-border e-commerce merchants receive payments in US dollar stablecoins from customers, they need to convert them back to dollars for settlement, but they cannot directly settle with US dollar stablecoins; they must first convert them into dollars on the Hong Kong Stock Exchange before returning to their bank accounts for settlement. From a practical business perspective, this addresses the "last mile" issue in inclusive finance.

Currently, a new C To B model is emerging in China's cross-border trade and international trade, where global C-end users place orders directly on Chinese internet e-commerce platforms. Chinese merchants no longer transport goods via containers but instead send packages. Once C-end users place orders, merchants package the purchased items, such as shoes and clothing, and deliver them directly to users' residences through logistics. Compared to traditional B To B To C container trade, C To B package trade urgently requires faster payment methods. If payments take 7 days to arrive, merchants must wait for payment before shipping, extending the package trade cycle to two or even three weeks. If US dollar stablecoins are used, payments from C-end customers to Chinese internet platforms arrive quickly and at low cost. In this context, cross-border e-commerce has become the biggest beneficiary of stablecoins, with Chinese cross-border e-commerce benefiting significantly. Although China has not yet recognized this payment method, it has greatly benefited from it, providing strong support for the facilitation of cross-border trade.

IV. US Dollar Stablecoins

Focusing further on US dollar stablecoins, their fundamental goal is not to assist in the sale of US Treasury bonds or increase buyers of US Treasury bonds, but to maintain the dollar's dominance as the world's mainstream currency, representing a continuation and development from gold-backed dollars, oil-backed dollars to tokenized dollars or digital dollars. It has been observed that last year, approximately $10 trillion to $20 trillion in transaction and payment volumes have exited the banking system. Once stablecoins are minted, they become unrelated to banks; customers holding stablecoins no longer depend on the banking account system or SWIFT. Currently, nearly $20 trillion in transaction volume has been achieved; purely from a payment perspective, it is less than $100 billion, but when combining transactions and payments, the scale is around $20 trillion.

Given that US dollar stablecoins bypass SWIFT, this poses a significant shock to US financial power; however, this trend is driven by technology and is unstoppable. Ultimately, the US may have to accept a compromise, allowing transactions to bypass SWIFT while striving to maintain the dollar's status. In this scenario, among the $20 trillion in stablecoin transactions last year, 99.99% were dollar transactions, primarily because other countries have not issued their own stablecoins, resulting in the market being dominated by the US.

Currently, the US government hopes to pass stablecoin legislation in Congress before the August recess. At this stage, there are two types of US dollar stablecoins, categorized into onshore and offshore. As of May 2025, the total minted amount reached $250 billion. The first is USDC, issued by the US fintech company Circle and the mainstream cryptocurrency exchange Coinbase, classified as an onshore US dollar stablecoin favored by US users. The second is USDT, issued by Tether, registered in El Salvador, which has no branches in the US. However, as a US dollar stablecoin, its reserve asset management is similar to that of currency asset funds, requiring the purchase of a large amount of US short-term Treasury bonds, dollar deposits, and cash, with related operations conducted by US institutions, thus considered an offshore US dollar stablecoin.

Hong Kong's "Stablecoin Ordinance" similarly distinguishes Hong Kong dollar stablecoins into onshore and offshore categories. Hong Kong dollar stablecoins approved by the Hong Kong Monetary Authority can be used locally by individual retail investors, but those issued outside Hong Kong, if recognized to some extent by Hong Kong regulatory authorities, can be used in Hong Kong but only for qualified investors, excluding retail investors. The same applies to US regulations. As for why USDT chose El Salvador as its registration location, it is because El Salvador's legal currency is already the US dollar, and the country has no own legal currency, having designated the dollar as its legal currency during legislation, thus there are no legal obstacles to conducting US dollar stablecoin-related business in El Salvador.

V. The Significance of Stablecoins for China

(1) Impact and Response

The impact of stablecoins on China is multidimensional at the currency level. On one hand, the form of currency continues to evolve over time, and when technological attributes empower currency alongside legal attributes, the competitiveness of the currency is significantly enhanced. In the landscape of currency competition among nations, superior currencies will inevitably exert a strong competitive advantage over those with slightly lesser competitiveness.

On the other hand, the process of currency globalization is accelerating. In 2024, the global trading volume of stablecoins reached $20 trillion, with the vast majority of transactions denominated in US dollars. This currency circulation model based on public ledgers provides a more efficient and lower-cost pathway for currency internationalization.

Furthermore, the global currency landscape is gradually moving towards multipolarity. In this process, countries need to actively consider how to enhance the competitiveness of their own currencies and explore the possibility of creating higher-quality currencies through technological empowerment and other means.

The facilitation of currency is also an important aspect that cannot be overlooked. The widespread application of stablecoins in Africa is primarily due to their ease of access and payment, which do not require meeting bank account opening conditions; global peer-to-peer payments can be achieved simply through mobile wallets, greatly enhancing the accessibility and efficiency of payments.

Given the numerous impacts brought by stablecoins, China is at a stage where it must respond actively. It can consider advancing related work in phases and layers. First, it could use Hong Kong as a "testing ground" to launch relevant pilot programs for offshore RMB stablecoins. For example, supporting Hong Kong in conjunction with mainland free trade zones, such as the Hainan Free Trade Zone, the Guangdong-Hong Kong-Macao Greater Bay Area, and the Shanghai Free Trade Zone. Particularly, the FTN accounts in the Shanghai Free Trade Zone have unique advantages, as its financial policies are relatively more convenient and comprehensive, which can be combined with stablecoin pilot programs to explore offshore RMB stablecoins. By accumulating experience through pilots, a foundation can be laid for broader promotion within the country in the future.

(2) The Synergy Mechanism with Central Bank Digital Currency (CBDC)

If the RMB stablecoin is officially launched in the future, it will be necessary to consider its synergy mechanism with the central bank's CBDC. One possible solution is to construct a dual-layer architecture, where the central bank directly opens accounts for stablecoin issuers. The stablecoin issuer deposits customer fiat currency into this account, and the central bank issues CBDC based on this, which the issuer then uses to mint stablecoins on the blockchain for global customer use. Of course, this idea still requires further exploration and refinement, but its core lies in exploring the organic integration path between the research results of the central bank's CBDC and the stablecoin architecture.

The positioning of central bank CBDCs and commercial institution stablecoins each has its focus, complementing each other. Central bank CBDCs emphasize centralized issuance to ensure monetary sovereignty and financial stability, while commercial institution stablecoins, once detached from the banking system, rely on blockchain technology for decentralized circulation, breaking through national and judicial jurisdictional limitations for free flow. In this model, the first half is led by the central bank's issuance, while the second half is driven by commercial institutions promoting market circulation, fully leveraging their respective advantages to jointly promote the innovative development of the monetary system.

(3) Understanding "Decentralization"

The concept of decentralization can be understood from multiple angles: first, from an economic perspective, decentralization is a trade-off between fairness and efficiency. If fairness is prioritized, decentralization is necessary to avoid excessive concentration of power in a single entity. Conversely, if efficiency is pursued, centralized decision-making is favored. Therefore, the degree of decentralization is closely related to the emphasis on fairness and efficiency. Ideally, a balance should be struck between the two.

Second, from the perspective of technical protocols, decentralization is an inherent requirement of underlying technology, not something that can be achieved at the application layer. The application layer must consider various factors such as user convenience and functional completeness, making it difficult to achieve decentralization. However, the underlying protocol must be decentralized. For example, blockchain protocols possess characteristics such as being open-source, permissionless, and free, similar to IP protocols, UDP protocols, HTTP protocols, etc., in the internet, which do not require permission from any entity and are universally applicable, exhibiting typical decentralized features. It is this decentralized characteristic that enables the internet and blockchain technology to achieve widespread interconnection and interoperability globally.

Third, in the field of data privacy protection, decentralization means that individuals have sovereignty over their own data. From the perspective of data privacy protection, it is necessary for the underlying protocol to be decentralized to safeguard individual data rights. However, in the context of global interconnectivity, if the internet features multiple different underlying protocols, it will lead to issues in interconnectivity. The application layer must generate significant social benefits, necessitating acceptance of regulation to eliminate negative externalities and enhance positive externalities. Therefore, the centralization of the application layer is an inevitable requirement.