With the US dollar's share of global official reserves falling to a historic low of 57.8% in Q4 2024, the United States is actively seeking new avenues to maintain its global currency dominance, particularly within the digital economy.

A key strategy involves aggressive legislation to entrench the dollar's role through stablecoins, which currently represent a staggering 99% of all stablecoins pegged to the USD or US Treasury bonds.

According to Liu Ying, a research fellow at the Chongyang Institute for Financial Studies at Renmin University of China, this legislative push within the past month aims to solidify and enhance the dollar's position in the global monetary system.

However, in the interview with National Business Daily, Liu highlights three fundamental structural flaws that prevent stablecoins from becoming a pillar of the monetary system.

The following is the transcript of the interview:

US Stablecoin Legislation: A Bid to Dictate Global Digital Currency Rules

The recent rapid passage of stablecoin legislation by the U.S. is a strategic move to "consolidate and elevate the dollar's dominant position in the global monetary system," extending its digital hegemony domestically and globally. This represents a more subtle, highly digitized "new playbook for dollar hegemony."

Given that stablecoins pegged to the dollar or US Treasury bonds overwhelmingly dominate the market at 99%, this legislation forcefully establishes and binds dollar-pegged stablecoins as the "core bridge" between the crypto world and the real world. By leveraging dollar-dominated stablecoins and the crypto-digital currency market settled in them, the U.S. aims to expand the dollar's influence in the burgeoning crypto-digital currency sphere.

This stablecoin bill provides a clear regulatory framework for dollar stablecoins, designed to attract greater institutional and technological innovation. It's more than just "supporting innovation"; it's about setting the global digital currency rules, thereby strengthening the U.S.'s leadership and drawing power in the global crypto market. This initiative not only safeguards traditional dollar hegemony but also represents a new attempt to digitize, intellectualize, and globalize dollar dominance. It seeks to embed the dollar into every corner of the global digital economy in an unprecedented way, fostering a more resilient and unchallengeable "digital dollar hegemony."

By constructing a so-called "closed loop" of "dollar issuance—dollar stablecoins—cryptocurrency transactions—US Treasury investment," this move ensures the dollar's dominance in digital asset transactions. It also aims to provide an invisible, continuous global funding pool for the massive U.S. national debt, indirectly alleviating some short-term Treasury pressure.

The astonishing profit margins of USDT issuer Tether directly illustrate this model. Its primary profit source isn't transaction fees, but rather investment returns generated by deploying its vast stablecoin reserves into high-yield assets like US Treasury bonds. As of the end of May 2025, the global stablecoin market surpassed $250 billion, with the vast majority being dollar stablecoins, and 80% of these stablecoin reserves invested in US Treasury bonds. Under this model, Tether operates like a "quasi-bank" sitting on enormous interest-free deposits, earning substantial returns by investing these stablecoin reserve "deposits."

However, this model is a "double-edged sword." While stablecoin issuers buying short-term US Treasury bonds partially "digest" the market, a panic or large-scale stablecoin redemption wave could force issuers to sell off US Treasury bonds to meet redemption demands. This could lead to sharp declines in Treasury prices, causing a systemic shock to the stability of the US Treasury market.

Photo/VCG

Three Inherent Flaws: Stablecoins Cannot Be a Monetary System Pillar

The expansion of stablecoins, particularly the unregulated growth of dollar stablecoins, has raised significant concerns among major central banks globally. Institutions like the Bank of England and the European Central Bank warn that stablecoins could undermine monetary sovereignty, squeeze bank deposits, and pose capital flight risks for emerging markets. These concerns are rooted in a deep understanding of stablecoin characteristics and their potential negative impacts.

Due to their anonymity, ease of cross-border movement, and low transaction costs, individuals and businesses in some countries might convert local deposits into stablecoins to avoid currency depreciation or evade capital controls. This would inevitably reduce bank deposits, weaken the foundation of local currency circulation, potentially lead to regulatory arbitrage, impact monetary policy transmission, and even trigger capital flight, thus destabilizing financial markets.

The Bank for International Settlements (BIS) explicitly states in its report that stablecoins suffer from three structural flaws that prevent them from serving as a pillar of the monetary system, limiting them to an auxiliary role:

Lack of Singleness: Traditional fiat currencies operate on a "no questions asked" (NAQ) principle, meaning transacting parties don't need due diligence. While stablecoins are pegged to fiat currencies or other assets, they lack sovereign credit backing. Consequently, transacting parties may need to examine the stablecoin's underlying reserves. Furthermore, the existence of multiple stablecoin issuers creates trust barriers and interoperability issues, preventing the singleness characteristic of fiat currency.

Lack of Elasticity: A monetary system requires the flexibility to expand or contract its money supply based on economic conditions, a crucial aspect of central bank monetary policy. For instance, the Federal Reserve rapidly expanded its balance sheet to nearly $9 trillion five years ago and has now shrunk it to around $6.6 trillion. Stablecoin issuers' balance sheets, however, cannot arbitrarily expand or contract, making it difficult for them to assume the critical role of stabilizing the macroeconomy. Stablecoins require 1:1 reserve assets to guarantee full payment and cannot flexibly expand or contract their balance sheets within regulatory frameworks. Their issuance and redemption mechanisms' elasticity are limited by the issuer's ability to acquire reserve assets, introducing uncertainty. In the event of large-scale redemptions, rapid liquidation of reserve assets could trigger market panic, and algorithmic stablecoins even risk a "value collapse."

Lack of Finality/Integrity: As digital bearer instruments, stablecoins can circulate freely across platforms and borders, making them susceptible to KYC (Know Your Customer) compliance deficiencies, which can facilitate illicit activities. The "stability" of stablecoins depends not only on reserve assets but also on legal status, risk management, data privacy, and consumer protection, posing significant challenges to their overall integrity.

File photo/Liu Guomei (NBD)

UST Collapse,A Stark Warning: Stablecoins ≠ Risk-Free

Stablecoins are a unique form of cryptocurrency, pegged to assets like fiat currencies, short-term bonds, or gold. Essentially, they are digital tokens of assets, combining "digital payment + value pegging" to replicate the stable value characteristic of fiat currencies, enabling them to act like traditional money in the digital world.

However, a fatal misconception among the public is equating stablecoin "stability" with the "absolute no-risk" of traditional fiat currency, assuming they are absolutely "stable." Fiat currency's "solid backing" stems from national sovereign credit and the central bank's unlimited legal tender guarantee. In contrast, stablecoins are issued by private entities, not central banks, and their stability is "derivative" of fiat currency, entirely dependent on the issuer's repayment promise based on its reserve assets.

This reliance on private credit makes "stability" inherently fragile. Stablecoin prices are not always stable; even mainstream stablecoins have experienced periods of significant volatility. The collapse of the algorithmic stablecoin UST in 2022, which saw its market capitalization evaporate by over 99.6% and its value almost zero in a short period, serves as an extreme example of this fragility. Even asset-backed stablecoins experienced significant price fluctuations when their custodian banks collapsed in early 2023.

Therefore, the "stability" of stablecoins hinges on the robustness, liquidity, reliability, and transparency of their reserve asset composition, as well as the issuer's ability to ensure its 1:1 redemption promise under any market conditions.