Zhou Xiaochuan’s Original Article: “A Multi-Dimensional Examination of Stablecoins” August 27, 2025, 15:02 Beijing
Comments on this article are presented as quotations in red text with sequential numbers, while bold text indicates Zhou Xiaochuan’s original text.
Current discussions on stablecoins often adopt a singular perspective. To fully understand their operational mechanisms and future prospects, a multidimensional and multifaceted examination is essential. Similarly, advancing the development of digital payment systems and ensuring their healthy growth necessitates attention to performance and balance across multiple dimensions.
I. Central Bank Perspective: Preventing Excessive Money Supply and High-Leverage Amplification
Stablecoin issuers aim to minimize their own costs while maximizing the scale of stablecoin issuance and adoption. They might ask: Why can central banks print money, but not us? Today, stablecoins grant them this printing press function. However, lacking deep understanding and responsibility regarding monetary policy, macroeconomic regulation, and public infrastructure functions, they may lack sufficient self-discipline. This could lead to uncontrolled issuance, high leverage, and instability (1). The stability of a stablecoin is not self-declared; it requires a mechanism for verification.
The central bank currently has at least two major concerns regarding stablecoins. First is “excessive issuance,” where issuers create stablecoins without maintaining 100% real reserves, effectively over-issuing. Second is the risk of high leverage amplification, where post-issuance operations generate a multiplier effect through money creation. While the U.S. GENIUS Act and Hong Kong’s Stablecoin Regulation have addressed these issues, their regulatory capabilities remain significantly inadequate.
First, it is essential to clarify who will serve as the custodian for the issuance reserve. In practice, there have been numerous instances where custodians failed to fulfill their duties, as evidenced by past cases. In 2019, Facebook initially planned to self-custody Libra’s issuance reserve assets, which would have granted it strong autonomy and allowed it to retain the income from the custodied assets. However, the custody of the reserve must be reliable and should be entrusted to a central bank or a custodian recognized and regulated by a central bank; otherwise, it would be considered unreliable (2).
Second, how should the multiplier effect in stablecoin operations be measured and managed? Even if issuers maintain 100% reserves, stablecoins will still generate a multiplier effect in subsequent operational phases—such as deposits, loans, collateralization, trading, and revaluation—potentially triggering runs that could exceed the issued reserves by several times. While regulations may appear to prevent amplification, a deeper examination of monetary issuance and circulation patterns reveals that existing rules fall far short of addressing derivation and amplification. Consider the example of Hong Kong’s three commercial institutions issuing Hong Kong dollar banknotes: Their issuance mechanism requires depositing one US dollar with the Hong Kong Monetary Authority as reserves for every 7.8 Hong Kong dollars issued, while simultaneously obtaining a liability certificate (3). Building upon the Hong Kong dollar cash base (M0), the economic and financial system generates M1 and M2 through creation and the multiplier effect. During a run on deposits, the demand for redemption extends not only to M0 but also to M1 or M2. Even with a 100% reserve requirement for the base money M0, relying solely on M0 reserves cannot withstand a run and maintain monetary stability.
Stablecoins exhibit a leverage effect through three distinct channels: the deposit-lending channel, the collateralized financing channel, and the asset market trading channel (enabling additional purchases or revaluation of reserve assets). Therefore, regulators must statistically track and calculate the actual circulating supply of issued stablecoins to accurately assess potential redemption risks. The leverage multiplier effect of stablecoins also creates opportunities for fraud and market manipulation (4).
Commentary:
“Today, stablecoins grant them this printing press function. However, lacking deep understanding and responsibility regarding monetary policy, macroeconomic regulation, and public infrastructure functions, they may lack sufficient self-discipline. This could lead to uncontrolled issuance, high leverage, and instability”. (1)
This argument is flawed. Commercial banks are also creating money today; otherwise, the concepts of M1 and M2 would not exist. The core issue with stablecoin money creation is that the newly created money operates outside central bank oversight. It relies on an irrational monetary system where currency controls have spun out of control. Does money created by commercial banks through collateralized assets not represent “uncontrolled issuance”? Why do banks have “off-balance-sheet assets”? Creating money through credit is far riskier than stablecoin money creation, which is asset-backed.
The early currency control policies benefited China. Currently, China accounts for 11% to 13% of global trade, yet the renminbi settlement volume remains around 3%, reflecting a severe imbalance. This stablecoin initiative presents a new opportunity to correct past mistakes, with virtually zero room for missteps. Back when Bitcoin was priced in renminbi, we handed it over to the United States without even securing a simple thank you.
“However, the custody of the reserve must be reliable and should be entrusted to a central bank or a custodian recognized and regulated by a central bank; otherwise, it would be considered unreliable “(2).
“Consider the example of Hong Kong’s three commercial institutions issuing Hong Kong dollar banknotes: Their issuance mechanism requires depositing one US dollar with the Hong Kong Monetary Authority as reserves for every 7.8 Hong Kong dollars issued, while simultaneously obtaining a liability certificate” (3).
You’re absolutely right—this is one of the biggest issues with stablecoin issuance, and Mr. Zhou has keenly identified it. The approach he proposes aligns perfectly with my own. Regarding the unreliability stemming from opaque stablecoin issuance, placing fiat currency under the supervision of the Hong Kong Monetary Authority addresses the problem of unreliability caused by lack of transparency. Unfortunately, Hong Kong’s regulatory authorities lack an expert of Mr. Zhou’s caliber.
“regulators must statistically track and calculate the actual circulating supply of issued stablecoins to accurately assess potential redemption risks. The leverage multiplier effect of stablecoins also creates opportunities for fraud and market manipulation” (4).
This statement reveals Mr. Zhou’s limited understanding of cryptocurrencies. The circulation of cryptocurrencies, including stablecoins, can be measured in real time. There is no need to manage them using the traditional methods applied to commercial banks and the renminbi.
The issuance of stablecoins does not involve a multiplier effect; instead, they are directly created in equal value to the underlying collateral, such as U.S. Treasury bonds. Risks exist here, as I discussed in my article regarding the danger of circular collateralization. Unlike credit-based money creation, this approach avoids the multiplier effect. While the multiplier effect cannot be entirely ruled out in the cryptocurrency sphere, its impact is highly limited.
II. Financial Service Model Dimension: The Genuine Demand for Decentralization and Tokenization
Assuming that future ecosystems will feature large-scale decentralization of financial activities and widespread tokenization of assets and trading instruments, stablecoins will prove highly useful. First, stablecoins can adapt to the development of decentralized finance (DeFi). Second, tokenization is a necessary foundation for DeFi operations. What requires deeper examination is why—or to what extent—we will move toward decentralization and tokenization.
From the supply side, blockchain and distributed ledger technology (DLT) indeed offer distinctive features for decentralized operations. However, from the demand perspective, how much demand exists for decentralization as a new operational framework? Will the majority of financial services migrate to this new framework? Upon closer examination, not all financial services are suited for decentralization, and few can achieve substantial efficiency gains through this approach. The genuine demand for tokenization as the underlying technology also warrants careful assessment (5).
Regarding the much-anticipated upgrade and transformation of payment systems—particularly cross-border payments—China and several Asian countries have achieved successful progress in developing retail payment systems based on mobile phones, utilizing QR codes and near-field communication (NFC) as merchant interfaces. These systems remain account-based. Currently, China’s digital currency development also follows an account-based approach, serving as an extension and iterative upgrade of the existing financial system. Additionally, the cross-border direct connectivity of fast payment systems in some Asian countries has not opted for decentralized, tokenized pathways. To date, centrally managed account systems continue to demonstrate strong applicability. The argument for replacing account-based payment systems with comprehensive tokenization lacks sufficient justification.
The Bank for International Settlements (BIS) has proposed a centralized ledger architecture—the Unified Ledger—to tokenize bank deposits and other extensive financial services. Within this centralized framework, central bank digital currencies (CBDCs) can play a significant role by combining centralization with tokenization. It is important to question whether all types of financial assets are suitable for tokenization, nor are all segments of financial services suitable for decentralization; each requires specific analysis and comparison. (6).
Commentary:
“Upon closer examination, not all financial services are suited for decentralization, and few can achieve substantial efficiency gains through this approach. The genuine demand for tokenization as the underlying technology also warrants careful assessment” (5).
“It is important to question whether all types of financial assets are suitable for tokenization, nor are all segments of financial services suitable for decentralization; each requires specific analysis and comparison.” (6).
The above remarks reveal Mr. Zhou’s misunderstanding of cryptocurrency as merely decentralization. Decentralization is merely a technical means employed by cryptocurrency. Openness and transparency are the true cornerstones of Bitcoin. We require transparent financial systems, transparent exchanges, transparent broker-dealers, and transparent stablecoins. We must address the opacity inherent in existing fiat currency systems. This marks another pivotal financial transformation in human history. The Bank for International Settlements’ unified ledger faces significant limitations. Without fundamentally grasping cryptocurrency and relying solely on traditional financial paradigms, China risks repeating the mistake of driving Bitcoin out of the country.
III. From the Payment System Perspective: Technical Pathways and Compliance Challenges
The transition to next-generation payment systems involves two major concerns: payment efficiency and compliance.
Enhanced payment efficiency is considered one of the potential advantages of stablecoins. In the ongoing digitalization of payment systems, there are two primary paths to improving efficiency. The first path involves continuing to build upon account-based systems, leveraging IT and internet technologies for optimization and innovation. The second path entails establishing an entirely new payment system based on blockchain technology and cryptocurrency (7).
Based on the current development of payment systems in China and Southeast Asia, the primary advancements achieved thus far remain grounded in internet and IT technologies. These include the growth of third-party payment platforms, progress in central bank digital currencies (CBDCs), NFC-based hardware wallets, and the interconnection of fast payment systems. These developments have significantly enhanced payment efficiency and convenience.
The technical approach itself is not the sole criterion. Comparing payment performance must also place high importance on security and compliance, including Know Your Customer (KYC), identity verification, account management, Anti-Money Laundering (AML), Counter-Terrorist Financing (CFT), anti-gambling, and anti-drug trafficking compliance requirements. Some argue that since stablecoins are blockchain-based, they do not require account opening. This is inaccurate. Even when using “soft wallets,” user identity verification and account opening procedures are necessary to meet compliance requirements. Currently, stablecoin payment services exhibit significant deficiencies in KYC and compliance.
Commentary:
“The first path involves continuing to build upon account-based systems, leveraging IT and internet technologies for optimization and innovation. The second path entails establishing an entirely new payment system based on blockchain technology and cryptocurrency” (7).
This statement is also problematic. Cryptocurrency is also an account system, albeit one based on anonymous accounts. It requires improvement. Internet technology forms the technical foundation for cryptocurrency, but the difference lies in their underlying principles: one is built on transparency and openness, while the other operates on a closed system. Both have their respective advantages. Moreover, the management costs associated with KYT (Know Your Transaction) in cryptocurrency are significantly lower than those of current systems. As demonstrated by Bitcoin’s inherent lack of regulatory requirements, transparent systems inherently carry much lower oversight costs.
IV. Market Trading Dimension: Market Manipulation and Investor Protection
From the perspective of financial and asset market transactions, the most critical issue to guard against is market manipulation, particularly price manipulation. This necessitates establishing full transparency and effective oversight (8). In fact, such manipulation already exists, with several related cases having occurred. Some instances of price manipulation exhibit clear fraudulent characteristics. However, under the current improved regulatory frameworks—whether the U.S. Genius Act, Hong Kong’s relevant regulations, or Singapore’s oversight provisions—these issues remain far from adequately addressed.
A new phenomenon is the mixed use of stablecoins or multiple currencies, where multiple currencies are simultaneously used for transactions or payments within a single system. Not all currencies in such combinations are truly stablecoins, nor do they necessarily adhere to consistent, universally recognized standards for stablecoins. In current asset markets, particularly within virtual asset exchanges, the payment currency for many transactions can be either stablecoins or other non-stable cryptocurrencies, or even entirely volatile currencies. This arrangement creates opportunities for market manipulation, making it a key focus for regulatory scrutiny.
Notably, some market promoters have suggested that through technological means such as stablecoins and Real-World Assets (RWA), asset transactions can be divided into extremely small shares, thereby enabling broader investor participation. They claim this model has already attracted a significant number of underage students to engage in trading. While some argue this fosters youth involvement in capital markets and contributes to their future prosperity, whether this practice genuinely benefits investors from a protection standpoint remains to be seen. Historically, emphasis has been placed on investors’ suitability and qualification requirements. Currently, there is insufficient evidence to determine whether minors are appropriately equipped to engage in asset market transactions. If market manipulation cannot be effectively prevented, attracting unqualified investors into the market would significantly amplify risks.
Commentary:
“From the perspective of financial and asset market transactions, the most critical issue to guard against is market manipulation, particularly price manipulation. This necessitates establishing full transparency and effective oversight” (8).
Correct, he’s an expert and has identified the issue accurately. Regulating transparency in cryptocurrency is quite straightforward. The flow of funds in any account can be monitored. The problem lies with centralized cryptocurrency exchanges, which, much like traditional securities brokers handling fiat currency, obscure the identities of traders. Regulation of these exchanges should be improved by drawing on the regulatory framework of stock markets. I have written articles detailing this approach.
V. Micro-Behavioral Dimension: Motivations of Each Stakeholder
The issuers of stablecoins are typically profit-driven commercial entities. In stablecoin-related payment services and asset trading operations, the majority of participants are also commercial institutions, which inherently pursue commercial motives. However, stablecoins and payment systems incorporate functionalities or components possessing infrastructure attributes and inclusive characteristics. These elements cannot be guided by the logic of maximizing corporate self-interest in micro-level operations but should instead embody the spirit of public service. Clear delineation is needed between areas suitable for market entities and those of an infrastructure nature.
A micro-level perspective is needed to analyze the motivations and behavioral patterns of various participants in the stablecoin ecosystem. What considerations drive users to make payments with stablecoins? Why do recipients accept stablecoins? What motivates stablecoin issuers? What trading scenarios do private exchanges pursue? Currently, Hong Kong has granted licenses to 11 virtual asset trading platforms. What are the primary trading entities and asset classes these licensed institutions focus on? How do they generate profits?
Although many believe stablecoins will reshape payment systems, objectively speaking, the current payment infrastructure—particularly in retail payments—has little room left for cost reduction (9). In China, the existing retail payment ecosystem—encompassing third-party payment platforms, central bank digital currency (CBDC), hardware/software wallets, clearing infrastructure, and more—has evolved over years without adopting decentralized or tokenized approaches. It has become highly efficient and cost-effective, leaving minimal room for new entrants to reduce costs and capture profits in this space. In the United States, however, some potential for cost reduction and profit gain may still exist within the retail payment system. This stems from America’s long-standing reliance on credit card payment systems, where merchants typically bear a 2% price discount. Consequently, there is motivation to explore new, lower-cost payment systems. This also highlights that, from the perspectives of both payers and payees, conditions vary significantly across different countries and regions.
Cross-border payments and remittances are frequently highlighted as key application areas for stablecoins. To delve deeper into this topic, we must first dissect the reasons behind the high costs of current cross-border payments, specifically identifying which stages contribute to these expenses. It’s important to note that claims about traditional cross-border payment systems being “extremely costly” from a technical standpoint may be overstated. In reality, most cost factors are not technical in nature but rather stem from foreign exchange controls, which are intertwined with institutional issues like balance of payments, exchange rates, and monetary sovereignty. Another portion of costs arises from compliance expenses such as KYC and AML, which stablecoins cannot easily circumvent. Additionally, a portion of the costs stems from the “rent” associated with cross-border foreign exchange operations being treated as a licensed activity. In summary, the appeal of stablecoins entering cross-border payments is not as significant as imagined. Of course, scenarios where a country’s domestic currency has collapsed and dollarization is necessary are a different matter.
From the perspective of stablecoin issuers, if they perceive insufficient appeal in domestic and cross-border payments, the most likely application focus will be asset market trading, particularly virtual asset trading. Certain assets in these markets exhibit strong speculative characteristics, making them susceptible to price inflation driven by hype. This creates an attractive environment for stablecoin issuance, especially since some virtual assets can themselves serve as qualified or semi-qualified reserves for stablecoin issuance.
From current micro-level behavior, we must be vigilant against the risk of stablecoins being overused for asset speculation. Deviations in direction could trigger fraud and destabilize the financial system.
Additionally, the practice of stablecoin-related industries leveraging the popularity of stablecoins to inflate their own valuations warrants attention. Certain companies may exploit this to raise capital through financial markets or cash out after capital appreciation, with little regard for the stablecoin business itself—whether it is profitable or sustainable. This undermines the healthy development of the entire financial system and may accumulate systemic risks.
Commentary:
“Although many believe stablecoins will reshape payment systems, objectively speaking, the current payment infrastructure—particularly in retail payments—has little room left for cost reduction” (9)
Indeed, China leads the world in retail payments and money transfers. While our infrastructure is robust, the renminbi’s restricted convertibility under the capital account prevents it from achieving its rightful international standing.
VI. Circulation Path Dimension: The Cycle Mechanism from Issuance to Redemption (10)
The circulation path of stablecoins encompasses the entire cycle from issuance to market circulation in specific scenarios and eventual redemption.
Taking the People’s Bank of China’s banknote issuance as an example, printed banknotes are first stored in designated issuance vaults. Whether and when these notes enter the market depends on commercial banks’ demand for cash. Commercial banks only withdraw cash from the central bank’s issuance vault when their customers have a net demand or when a credit gap arises. Withdrawals incur holding costs for commercial banks, prompting them to return excess inventory when stockpiles grow too large. This demonstrates that currency circulation does not occur automatically. Similarly, obtaining relevant licenses and depositing reserves does not guarantee stablecoin issuance. Without sufficient demand scenarios, stablecoins may fail to achieve effective circulation—potentially leaving issuers holding licenses but unable to deploy their tokens. Theoretically, circulation pathways should form a network structure, often featuring several high-traffic main channels. If the payment channel becomes obstructed, the primary route for stablecoins to enter circulation may become overly reliant on speculative virtual asset trading, raising concerns about systemic health.
Additionally, whether stablecoins are used as a temporary medium of exchange during transactions or as a store of value over a specific period affects their market circulation after issuance. If held minimally solely for transactional purposes, stablecoins assume a weaker role with lower issuance volumes. This involves circulation pathways, holding motivations and behaviors, as well as supporting systems. Such characteristics are not automatically conferred by issuance licenses.
In summary, when confronting the novelty of stablecoins, scholars, researchers, and practitioners must adopt a multidimensional approach to observe and analyze their functions and implementation pathways, avoiding the use of imprecise concepts, unreliable data, and one-dimensional thinking. Only through comprehensive evaluation across all critical dimensions can we better navigate market trends.
Commentary:
The Cycle Mechanism from Issuance to Redemption (10)
This is a market-driven mechanism. The bank-backed asset issuance model functions more like M2, requiring no central bank oversight. Take USDT as an example: it handles its own issuance and redemption, operating independently of the Federal Reserve.
Comment Summary
Zhou’s analysis is of a high caliber. It’s a rare gem in the industry. He consistently maintains a precise grasp of the term “cryptocurrency,” demonstrating a certain depth in his research on the subject. This level of understanding far surpasses the use of the term “digital currency” by Hong Kong regulators.
The advantages need no elaboration. As a top figure in China’s financial sector, he is overly confident in his own knowledge, using it to critique cryptocurrency—a field he doesn’t fully grasp. His strengths lie more in details than in strategic vision. He fails to recognize that centralized fiat currency is a product of the industrial age, while cryptocurrency is a product of the internet age. The two differ fundamentally in system architecture, operational methods, and evaluation criteria.
At its core lies a fundamental divergence in logical thinking. When the internet first emerged, it was met with widespread skepticism. Yet on January 9, 2009, the Bitcoin whitepaper identified three fundamental flaws in fiat currency. Bitcoin’s very existence aims to dismantle central banks and abolish the fiat monetary system. Satoshi Nakamoto sounded the clarion call for the demise of fiat currency. Now, with the introduction of the U.S. stablecoin legislation, the trumpet has been sounded for the demise of traditional fiat currency—and indeed, the traditional financial system itself.
Without transformation, we will surely perish; the renminbi will inevitably collapse. America revolutionized itself by dismantling the Federal Reserve—this will be the next step we witness. The Americans’ “Genius Act” is utterly rotten, yet openness and rapid iteration may keep them perpetually ahead. Missing this opportunity will be far worse than missing out on Bitcoin.
Disclaimer: My perspective serves as a supplement to Mr. Zhou’s views. Reading both perspectives greatly aids in understanding cryptocurrency. All my views are detailed in the article below. Without having read it and lacking a background in cryptocurrency, my statements may seem ignorant, sharp, and extreme.
Recommended Reading
For further details on related discussions, please visit the Chainless website and read the following articles:
1. “Will Introduction of the Stablecoin Act Trigger a Financial Tsunami?“
2. “Stablecoins – America’s Path to Defending Financial Hegemony“
3. “When Stablecoins Tear Down Banks’ Interest Margin Moats“
4. “The Current Method of Issuing HKD Stablecoins Needs Restructuring “
5. “The Regulation of Cryptocurrency Part1 – 4“
6. “Conceptual Confusion Caused by Hong Kong’s Stablecoin Regulations and Clarification Thereof“
10. “Openness and Transparency: The True Cornerstone of Bitcoin“
Zhu Weisha August 28, 2025 In Hong Kong
