Xiao Feng's latest speech: stablecoins are a new stage in the evolution of currencies

From a practical point of view, stablecoins have actually become more than just a payment instrument, but a new stage in the evolution of the currency, which can be called "tokenized money".

(1) The technical value of the distributed ledger

To truly understand stablecoins, we need to sort out the background of their development. Stablecoins are built on the foundation of distributed ledger technology. Distributed ledger technology is the third iteration of human computational methods in thousands of years. The first was single-entry accounting. According to the clay tablet ledgers found in the Sumerian region so far, a single-entry method of accounting was used, which only recorded income and expenditure.

By around 1300 AD, double-entry bookkeeping had emerged in Italy, a method of recording not only income and expenditure, but also assets and liabilities. For more than 700 years, the calculation method was only optimized, and no new iterations appeared.

It wasn't until 2009, when the Bitcoin blockchain appeared, that a new method of computation, known as distributed accounting, appeared for the first time. The biggest difference between the distributed accounting method and the previous accounting method is that the previous accounting method is to record its own accounts and belong to the private ledger. For example, if a remittance from Beijing to New York involves the participation of multiple institutions, it will require a certain amount of effort to align all the information on the private ledgers of those institutionsTime and cost. However, a distributed ledger is a public ledger in which both institutions and individuals across the globe keep accounts on the same ledger, so there is no need for many institutions to align information, and the two parties to the transaction can directly complete the payment in a peer-to-peer manner, which is the biggest difference between the two calculation methods.

After the advent of the Bitcoin blockchain, stablecoins began to appear in 2014. As distributed ledger technology continues to be engineered, matured, and optimized, two trends have emerged: On the one hand, since 2009, people have created Bitcoin, Ethereum, etc. on the blockchain "out of nothing", which are called "digital natives". On the other hand, since 2014, the emergence of stablecoins represented by USDT has marked the emergence of another trend, namely "digital twins". The so-called digital twin refers to the fact that an asset already exists in the real world, such as the US dollar, and is introduced into the blockchain and tokenized, that is, the existing asset is digitally mapped onto the chain.

At the same time, with the approval of the launch of Bitcoin ETFs in the United States and Hong Kong last year, a new phenomenon has emerged: the transfer of digitally native assets 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 buy and sell them in the same way that stock trading works. Bitcoin itself exists on-chain, while Bitcoin ETFs exist off-chain. Therefore, in this process, the transformation of On-Chain and Off-Chain, as well as the interaction between digital twin and digital native, is involved.

In the practice of distributed ledger technology in the past ten years, if it is regarded as a social engineering experiment, we can see the changes in it, and gradually prove the value of these technologies.

(2) As a new financial market infrastructure

Based on distributed ledger technology, financial market infrastructure has also undergone significant changes since 2009, which are based on changes in distributed accounting. Financial market infrastructure mainly includes a series of mechanisms such as payment, trading, clearing and settlement. So what's new about the new mechanics compared to the old ones? What are the characteristics of the old mechanism and the new mechanism?

At present, the financial infrastructure assets we rely on are based on a central registry, central depository, central counterparty transaction and central clearing model, which requires the coordination of at least three or more institutions to complete the clearing and settlement of a transaction. However, on a distributed ledger, since all participants are bookkeeping on the same ledger, the transaction model changes to peer-to-peer transactions, and transactions can be completed directly between any two people, eliminating the need for intermediaries.

The settlement model of existing financial market infrastructures is netting, while the settlement mode on distributed ledgers is transaction-by-transaction. In other words, once the transaction is confirmed, the settlement is completed and the money is settled. From the perspective of the stock market, the New York Stock Exchange will launch a 5×23-hour trading model by the end of this year, and one hour will be reserved for clearing after the end of trading hours; The Nasdaq will launch a 24×5 trading model in the future, however, the Nasdaq will not be able to achieve this goal within this year because under the old financial infrastructure, the trading process must be suspended for a period of time for liquidation. In contrast, virtual currency exchanges in Hong Kong have enabled 24×7 trading without holidays, precisely because of the different types of ledgers, which leads to different financial market infrastructures. This is also one of the backgrounds of stablecoins, which are built on top of new financial market infrastructures.

(1) What is asset tokenization?

In the author's opinion, asset tokenization actually originated from USDT, which refers to the on-chain and tokenization of real-world assets through blockchain technology. Its development has gone through three stages:

The first stage is the emergence of USDT, which was timed in 2015. Ten years of practice and social experiments from 2015 to the present show that the tokenization of fiat currencies has great value, not only in the field of payment and clearing, but also in other aspects, which will be elaborated later. Against this backdrop, countries have embarked on legislation aimed at regulating and further promoting it under the licensing and regulatory framework. According to 2024 statistics of different calibers, the minimum transaction volume of US dollar-based stablecoins is $16 trillion, while the higher statistics are $28 trillion. Whether it's $16 trillion or $28 trillion, this shows that distributed ledger and blockchain-based stablecoin applications have become a "killer application" that is widely used. Its largest user group is those in Africa who do not have bank accounts, using USDT and USDC to complete cross-border payments.

The second phase began last year, with the tokenization of fund products launched by BlackRock, Fidelity and others in the United States, such as U.S. Treasury funds, U.S. dollar currency asset funds, etc., these funds were tokenized and put on the chain, starting the process of tokenization of financial assets.

The third stage is the tokenization of physical assets, that is, the tokenization of physical assets such as real estate and hotel assets. This phase is still in the exploratory stage and may be gradually advanced from this year, and there are already billions of dollars in physical asset tokenization practices.

The three stages are arranged in order from easy to difficult. Tokenization of fiat currencies is relatively easy because it does not require reliance on other means for credit endorsement. Fiat currencies such as the US dollar and the Chinese yuan are backed by national laws, so the market has a high degree of trust in them, and the tokenization process is relatively simple. Tokenization of financial assets is comparatively more complex, but it is still easier than tokenization of physical assets because its issuers and custodians are usually regulated licensed financial institutions, and the custody is mainly in banks. People trust these licensed financial institutions, which are subject to strict financial regulation, and therefore are more receptive to their tokenization.

The biggest difference before and after tokenization is that once an asset is minted as a token on-chain, it leaves the banking system, both out of the bank account system and awayThe SWIFT system has become a decentralized form. Therefore, whether the token exists on the chain and whether it is permanent needs to be guaranteed by a strictly regulated financial institution (custodian bank). Tokens are generated based on instructions issued by the custodian bank, for example, the custodian bank mints $100,000 in tokens (e.g., USD stablecoins) after the custodian bank confirms receipt of $100,000 from the customer. This type of instruction is only recognized by the custodian bank, so the process is relatively simple.

However, there is currently no mature solution for physical asset tokenization. The main problem is how to put the information on the chain, confirm the ownership, and how to ensure the strong binding of the on-chain information and the off-chain physical assets, because the two are easily decoupled. For example, for real estate, it is necessary to put the property information on the chain, which requires the cooperation of multiple parties, such as the housing authority and other relevant departments, but this problem has not been well solved.

In the blockchain industry, while there is a potential solution, it is currently immature and is called DePin (Decentralization). In theory, each block can collect data on-chain, thus ensuring the real existence of the asset and verifying it on-chain. For example, the charging pile can be installed with a blockchain communication module, through which data such as the usage time, charging volume, and income of the charging pile can be directly uploaded to the chain. However, this path is currently under-technologically mature and costly, so physical asset tokenization is relatively rare. It is expected to develop from 2025.

(2) The significance of asset tokenization

It has been suggested that why tokenization is being carried out and how is it special for traditional currencies such as the Chinese yuan or the US dollar? The necessity of tokenization is that:

1. Improve the global liquidity of assets

When an asset is minted as a token on the public chain, it is easily accessible to investors around the world, giving the asset liquidity on a global scale. This is equivalent to including it in a global liquidity pool. For example, buying shares on the Hong Kong Stock Exchange is a complicated process for Brazilian investors, requiring them to open an account in Hong Kong and convert their currency into Hong Kong dollars before they can trade. However, on the blockchain, these red tapes are omitted because it removes traditional mechanisms such as central registries and central depositories, enabling peer-to-peer transactions. Investors can independently search for information and decide whether to buy or not. This greatly improves the accessibility of assets and the ease of trading.

2. New settlement model

Tokenization brings a peer-to-peer settlement model with fewer links, higher efficiency, and lower costs. According to preliminary statistics, the number of capital turnovers of traditional banks is about 7 to 8 times a year, while the number of capital turnovers based on decentralized finance (DeFi) mortgage lending can reach 67 times a year, which is almost 10 times that of traditional banks. The fastest case for a loan on the blockchain is 10 seconds, including lending, recycling, and interest settlement, and this model is known as a "flash loan". "Flash loans" are achieved through over-asset-collateralized rather than leveraged lending, and the interest rate on USDT on-chain lending is 8%. This high interest rate comes from a significant increase in the frequency of capital turnover, rather than amplifying returns through leverage. Therefore, tokenization not only improves the efficiency of capital turnover, but also reduces risk by eliminating the need for leverage.

3. Programmability

Traditional currencies (such as the Chinese Yuan and the U.S. dollar) are not programmable, while tokenized currencies can be programmed through smart contracts. This feature has been widely used in clearing and default handling in smart contracts, which greatly improves efficiency. For example, in on-chain lending, once a default condition is triggered, the smart contract automatically executes the liquidation without the intervention of an accountant, bank, or court. This process can be completed in just a few seconds, whereas in traditional financial markets, dealing with defaults requires a large number of intermediaries and a longer period of time.

4. Future-oriented AGI era

With the advent of the era of artificial intelligence general intelligence (AGI), machines will create economic value independently of humans, and payments and settlements between machines will also be required. In this case, transactions between machines cannot rely on traditional payment methods, but need to be paid, cleared, and settled through smart contracts and programmable money. Fiat currencies must be programmable if they want to maintain their importance and value in the age of AGI. Therefore, tokenization is not only the need for current financial innovation, but also an inevitable choice for future technological development.

The properties of money have gone through three iterations: First, early money had natural properties, whether it was shells, gold, silver, or copper, all of which originated from nature and were given monetary properties. Second, with the emergence of sovereign states, such as the renminbi, the US dollar, the British pound and other fiat currencies were born, the currency at this stage has legal attributes. Third, digital currencies such as Bitcoin are generated, which are based on digital technologies such as cryptography, distributed ledgers, digital wallets, and smart contracts, which constitute the technical attributes of currencies and enable them to gain global consensus. Based on this consensus, the total market capitalization of Bitcoin has reached more than $2 trillion.

Stablecoins have a dual nature: on the one hand, fiat currencies are legally mandated to give value and are used by people. On the other hand, when fiat currency is converted into a stablecoin, it has technical properties, it runs on a distributed ledger, and it is issued, minted, and operated according to technologies such as cryptography, distributed ledgers, digital wallets, or smart contracts. From this point of view, stablecoins can be regarded as the tokenization of fiat currencies, which is the best currency created by mankind at present.

From the perspective of currency attributes, stablecoins have functions such as payment and settlement. In addition to this, stablecoins not only have technical properties such as programmability, but are also currencies that span time and space. Once the currency is converted into a stablecoin and runs on the chain, it crosses the space limit as well as the judicial area limit. For example, in Africa, where more than 60% of the population does not have a bank account and cannot access currencies such as the US dollar through banks, mobile wallets make it easy to buy USD stablecoins on-chain. Third, it is a high-circulation currency, which restricts circulation through smart contracts on the chain, and the efficiency is higher than that of real currency circulation. Fourth, it is a democratized currency. Specifically:

(1) Discuss stablecoins from the perspective of reserve assets

Stablecoins are the same as money market funds in terms of asset reserve management. The stablecoin issuer receives the customer's USD and deposits it with the custodian bank, which issues instructions to the issuer, such as receiving $100,000 from someone, and the issuer then mints $100,000 of stablecoin for them on-chain. The underlying asset of the stablecoin is fiat currency, but the fiat currency is not directly circulated, but circulated through tokens, and its management method is the same as that of money market funds. There is concern about whether this involves money creation, but there is no money creation. Because fiat currency is only deposited in place, the issued currency has no leverage and no currency storage, so the disturbance to financial stability is relatively small. Stablecoins are only circulated in the form of tokens at high speed across time and space, replacing leverage. The reason why there is no currency storage is because it improves the efficiency of capital turnover, for example, "flash loans" can be lent and repaid in less than 10 seconds.

From the perspective of reserve assets, stablecoins actually solve the "last mile" problem of financial inclusion. Financial inclusion requires easy access to financial services, and without a financial account, financial inclusion is impossible. Stablecoins are widely adopted in Africa, albeit in modest amounts. In Kenya, for example, 60% of the population does not have a bank account, so the development of mobile number-based payment methods has become a classic case of financial inclusion. Now, through mobile wallets, Kenyans can not only send SMS to telecom operators to complete payments, receive or payments, but also obtain US dollar stablecoins more conveniently on-chain through digital wallets, which is more convenient than bank account systems.

(2) Analysis of stablecoins from the perspective of cross-border payment facilitation

With access to the USD stablecoin, holders have the ability to make cross-border payments, which is a huge step forward for financial inclusion and greatly increases access to financial services. As a result, those in Africa who do not have bank accounts have access to the possibility of global payments through mobile wallets, and Chinese cross-border e-commerce has become the biggest beneficiary. In Yiwu, it was found that local export merchants began to collect US dollar stablecoins. After receiving the US dollar stable currency paid by the customer, the merchant of China's cross-border e-commerce international trade needs to return the foreign exchange settlement, but cannot directly settle the foreign exchange with the US dollar stable coin, and can only exchange it for US dollars and return it to the bank account on the Hong Kong Stock Exchange for foreign exchange settlement. From a practical business point of view, it solves the problem of the "last mile" of inclusive finance.

At present, a new model of C to B has emerged in China's cross-border trade and international trade, that is, global C-end users directly place orders and purchases on China's Internet e-commerce platform, and Chinese merchants no longer transport goods through containers, but through the form of parcels. Compared with the traditional B to B To C container trade, C to B parcel trade needs a faster payment method. If the payment takes 7 days to arrive, the merchant will have to wait for the payment to be collected, and the parcel trade cycle will be extended to two or even three weeks if the traditional payment method is used. If the US dollar stablecoin is used, when the C-end customer pays to the Chinese Internet platform, the payment will be fast and the cost will be very low. In this context, cross-border e-commerce has become the biggest beneficiary of stablecoins, and China's cross-border e-commerce has benefited a lot. Although China does not currently recognize such payment methods, Chinese have benefited greatly from them, providing a powerful boost to cross-border trade facilitation.

To further focus on the US dollar stablecoin, its fundamental goal is not to help the sales of US Treasury bonds and increase the buyers of US Treasury bonds, but to maintain the hegemony of the US dollar as the world's mainstream currency, which can be called the inheritance and development from the gold dollar, petrodollar to the token dollar or digital dollar. It has been observed that last year, about $10 trillion to $20 trillion in transactions and payments have been taken out of the banking system. Once the stablecoin is minted, it is bank-agnostic, and customers no longer rely on the bank account system and do not need to rely on SWIFT after holding the stablecoin. At present, close to 20 trillion US dollars of transaction volume has been reached, and from the perspective of payment, although it is less than 100 billion US dollars, the combination of transactions and payments is about 20 trillion US dollars.

Given that the US dollar stablecoin bypasses SWIFT, this is a major shock to US financial power, yet the trend is unstoppable because it is driven by technology. In the end, the United States may have to accept a compromise that allows SWIFT to be bypassed, but seeks to preserve the dollar's position. In this case, 99.99% of the $20 trillion stablecoin transactions last year were in US dollars, and the market was occupied by the United States because other countries did not issue their own stablecoins.

Currently, the U.S. government expects to pass the stablecoin bill before Congress adjourns in August. At this stage, there are two types of USD stablecoins, which are divided into two types: onshore and offshore. As of May 2025, the total mint will reach $250 billion. The first is USDC, which is issued by Circle, a US fintech company, and Coinbase, a mainstream cryptocurrency exchange, and is an onshore USD stablecoin favored by US users. The second is USDT, which is issued by Tether, a company registered in El Salvador, and has no branches in the United States. However, as a US dollar stablecoin, its reserve asset management is the same as that of a monetary asset fund, which requires the purchase of a large number of US short-term Treasury bonds, US dollar deposits and cash, and the relevant operations are completed by US institutions, so it can be regarded as an offshore US dollar stablecoin.

Hong Kong's "Stablecoin Ordinance" also divides Hong Kong dollar stablecoins into onshore and offshore categories, and Hong Kong dollar stablecoins approved by the Hong Kong Monetary Authority can be used by individual retail investors in Hong Kong, but Hong Kong dollar stablecoins issued outside Hong Kong, if recognized by Hong Kong regulators to a certain extent, can be used in Hong Kong, but only for qualified investors, retail investors are not allowed to use, and the same is true for relevant US regulations. As for why USDT chose El Salvador as its place of registration, the reason is that the legal tender of El Salvador is the US dollar, and the country does not have its own legal tender currency, and the US dollar has been designated as legal tender when it was legislated, so there is no legal obstacle to carrying out US dollar stablecoin-related business in El Salvador.

(1) Impact and response

The impact of stablecoins on China is multidimensional at the monetary level. On the one hand, the form of money continues to evolve over time, and the competitiveness of money will be significantly improved when the technical and legal attributes are integrated to empower the currency. In the pattern of currency competition between countries, a better currency will inevitably have a strong competitive advantage over other currencies that are less competitive.

On the other hand, the process of currency globalization is accelerating. In 2024, the global stablecoin transaction volume will reach $20 trillion, and the vast majority of these transactions will be denominated in US dollars. This public ledger-based currency circulation model provides a more efficient and less costly way to internationalize money.

In addition, the global monetary landscape is gradually developing in the direction of multipolarity. In this process, countries need to actively think about how to improve the competitiveness of their currencies and explore the possibility of creating better currencies through technological empowerment and other means.

Monetary facilitation is also an important aspect that cannot be overlooked. The key to the widespread use of stablecoins in Africa lies in their convenience of obtaining and paying, which can achieve peer-to-peer payments worldwide with the help of mobile wallets without meeting the requirements for opening a bank account, which greatly improves the accessibility and efficiency of payments.

Given the many impacts of stablecoins, China is at a stage where it must actively respond. The relevant work can be carried out in stages and at different levels. First of all, Hong Kong can be considered as a "testing ground" to carry out relevant pilot projects for offshore RMB stablecoins. For example, we will support Hong Kong in joining hands with the Mainland's free trade zones, such as the Hainan Free Trade Zone, the Guangdong-Hong Kong-Macao Greater Bay Area, and the Shanghai Free Trade Zone. In particular, the FTN account in the Shanghai Free Trade Zone has unique advantages, and its financial policies are relatively more convenient and perfect, which can be combined with the stablecoin pilot and explored from the offshore RMB stablecoin. Accumulate experience through the pilot to lay the foundation for subsequent promotion on a larger scale in China.

(2) Synergy mechanism with central bank digital currency (CBDC).

If the RMB stablecoin is officially launched in the future, it is necessary to consider the synergy mechanism between it and the central bank's CBDC. One possible option is to build a two-tier architecture, where the central bank opens accounts directly for the stablecoin issuer. The issuer of the stablecoin deposits the account after receiving the customer's fiat currency, and the central bank issues CBDC to it accordingly, and the issuer then uses the CBDC to mint the stablecoin on the blockchain for the customer to use globally. Of course, this idea needs to be further explored and refined, but its core lies in exploring the organic combination of the central bank's CBDC research results and the stablecoin architecture.

The positioning of central bank CBDCs and commercial institutional stablecoins have their own focuses, and the two complement each other. The central bank's CBDC focuses more on centralized issuance to ensure monetary sovereignty and financial stability; After leaving the banking system, the stablecoins of commercial institutions rely on blockchain technology to achieve decentralized circulation, break through national borders and judicial regional restrictions, and achieve free circulation. Under this model, the central bank will lead the issuance in the first half, and commercial institutions will promote market circulation in the second half, giving full play to their respective advantages and jointly promoting the innovative development of the monetary system.

(3) The understanding of "decentralization".

The concept of decentralization can be understood from many perspectives: First, from the perspective of economics, decentralization is really a trade-off between fairness and efficiency. If the focus is on fairness, decentralization is needed to avoid excessive concentration of power in a single entity. On the other hand, if efficiency is pursued, centralized decision-making is preferred. Therefore, the degree of decentralization is closely related to the focus on fairness and efficiency. Ideally, a balance needs to be struck before the two.

Second, from the perspective of technical protocols, decentralization is an inherent requirement of the underlying technology, and cannot be achieved by the application layer. The application layer needs to take into account many factors such as user convenience and functional integrity, so it is difficult to achieve decentralization. However, the underlying protocol must be decentralized. Taking blockchain protocol as an example, it has the characteristics of open source, permissionless, and free, which is similar to the IP protocol, UDP protocol, HTTP protocol, etc. in the Internet. It is this decentralization that enables the Internet and blockchain technology to be widely interconnected and interoperable on a global scale.

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, the underlying protocol is required to be decentralized to protect the rights of personal data. However, in the context of global interconnection, if there are multiple different underlying protocols on the Internet, it will lead to problems in interconnection. Due to the need to produce huge social benefits, the application layer must be regulated, and the negative externalities must be eliminated and the positive externalities enhanced through regulation. Therefore, it is an inevitable requirement for the application layer to present the characteristics of centralization.