Zhou Xiaochuan, former Governor of China’s central bank from 2002 to 2018, has expressed his skepticism about using yuan-based stablecoins. He believes that the volatility of cryptocurrencies poses significant risks, which could undermine the stability that stablecoins are meant to provide.
On Wednesday, the CF40 think tank shared his remarks made at a closed-door seminar in July. Zhou said that “Be wary of the risk of stablecoins being over-used for asset speculation. Deviation in direction may lead to fraud and instability in the financial system.”
Zhou Xiaochuan’s comments come at a time when China’s government is considering a plan for stablecoins, which are digital currencies tied to the yuan.
China’s top government group, the State Council, is also looking into a plan for stablecoins, linked to the yuan. The move might show China’s interest in keeping up with other countries like the U.S., Japan, and South Korea, where stablecoins tied to their currencies are being supported.
Further, Chinese government officials are still cautious about stablecoins, which are digital currencies meant to hold a steady value. Recently, they told financial companies, like brokers and banks, to stop advertising or promoting stablecoins. This review suggests China is keen to explore stablecoins but is wary of the risks involved.
He believes the need for stablecoins is exaggerated. Zhou said China’s current mobile payment systems, which use QR codes and NFC, are already very efficient and connected to banks. These systems work well without needing the decentralized technology that stablecoins rely on, suggesting stablecoins may not add much value to China’s financial setup.
“After years of development, it has become very efficient and low-cost, leaving very limited room for any new entrant to reduce costs and make profits in this field,” Zhou said. He also credited central bank digital currencies for further enhancing China’s payment infrastructure.
He has also raised concerns about the stability of stablecoins, even when fully backed by reserves. He warned that using stablecoins for loans, mortgages, or purchases could make their total value grow much bigger than the actual money set aside to back them.
According to him, if lots of people try to withdraw their stablecoins at the same time, the demand could be way more than the available funds, leading to serious financial trouble. Zhou suggested that a bank run could result in liabilities several times the issuance reserve, noting that existing regulations, such as the U.S. Genius Act or Hong Kong’s rules, are insufficient to address such risks.
