Weili Zhu
JunHe, Shanghai
zhuweili@junhe.com

Introduction

With the advent of blockchain or distributed ledger technology, its application within various lines of business and the results arising from such applications have proven its profound significance as a transformative technology for industry and society and as a pillar of the fourth industrial revolution. Among its uses, its application within the field of payments and finance in the form of bitcoin and other cryptocurrency has led to significant developments, including not only in the advancement of payment efficiency and cost reductions, but also frequent speculation events and the occurrence of criminal activities. Nonetheless, although cryptocurrency has been hitting the headlines for many years now, it was not until the emergence of stablecoins pegged 1:1 to fiat currencies that this virtual asset, originally developed based on distributed ledger technology and cryptography and without any link to real-world assets, began to be discussed in the context of monetary policy, financial stability and national security. This development was arguably meant to put a ‘saddle’ on the high volatility and constant value fluctuations of virtual assets and stabilise the price in order to make financial product design possible. But, in making it potentially feasible to bypass conventional banking and traditional financial systems, this development resulted in various regulatory and compliance issues and concerns.

The frenzy around the blockchain and cryptocurrency spread across the globe and has led to significant legislative actions in various jurisdictions. For example, in the United States, with its federal system of governance and the prevailing concept of a free market, the country has a natural advantage in regard to harnessing the rapid development of stablecoins to the benefit of private enterprises. Following a series of major legislative actions, in the form of the GENIUS Act, the first federal-level cryptocurrency legislation signed by the Trump administration in 2025, private institutions arguably have been provided with a legal basis to participate in the issuance and operation of national currency. Spurred on by these legal developments, JPMorgan’s momentous move to introduce secured financing products backed by crypto-asset collateral in October, alongside corresponding deployments and developments in the crypto field by major financial institutions such as Morgan Stanley and Goldman Sachs, Wall Street, which was once sceptical of crypto-assets, is now embracing the technology as result of such developments. Elsewhere, the European Union has adopted the Markets in Crypto-Assets (MiCA) Regulation (Regulation (EU) 2023/1114) and is preparing to rollout the Digital Euro, England has proposed a digital pound initiative, otherwise known as Britcoin, and the adoption of crypto-friendly policies in other countries and regions is also advancing rapidly.

While the rest of the world is vigorously engaged in the business of stablecoins and virtual assets, China, being one of the countries that quickly embraced crypto in the early days and which arguably once dominated the bitcoin and crypto market (crypto mining in particular) nearly a decade ago, has always been a focal point in regard to its stance on crypto and the related measures being adopted in regard to this global technological transformation. However, in light of the recent suspension of stablecoin issuer licence applications in Hong Kong, following the introduction of the stablecoin rule and a series of seemingly positive policy developments, there are inevitably questions and speculation about the Chinese government’s attitude to this technology. The topic of blockchain technology’s application in the financial field is relatively broad, and while cryptocurrencies and stablecoins are mainly used to support crypto-asset trading, this article will only address the impact of stablecoins on the payments industry and the traditional financial system from a national currency perspective, as well as shedding light on China’s policies and position on the matter.

The mainland

Despite its early active involvement in crypto activities, mainland China has been taking action to hold back the rise of crypto since 2017, cumulating in the adoption of a total ban on crypto business in 2021. This restrictive policy stance against crypto business has been ongoing for almost a decade now and was recently reiterated during the latest meeting of the People’s Bank of China, the key financial regulator, held on 28 November 2025. Also, in 2025, the governor of the People’s Bank of China, Pan Gongsheng, reiterated on several occasions the importance of strict controls and a total crackdown on crypto business in mainland China, which includes stablecoins. As a result, various major players in the crypto world, such as Binance and OKX (formerly OKEx), which originated from China, are now based overseas, and numerous ‘crypto-natives’ and practitioners have left the country. However, illegal activities involving stablecoins, virtual assets and real-world assets (RWAs) still frequent the mainland market. For example, illegal underground crypto trading, unlawful trade involving over-the-counter (OTC) exchange intermediaries, money laundering, crypto exchange hacking and theft, pyramid schemes and fraudulent activities are all extremely common. In recent years, a large number of civil and criminal cases concerning such illegal activities have been brought and enforced before the courts. As a next step, during its latest meeting held on 28 November, the People’s Bank of China has confirmed its plan to work with other administrative and judicial authorities to further reinforce the prohibition on such activities and take the crackdown campaign against crypto to the next level. Nonetheless, mainland China is not going to ignore the significant impact and benefits of blockchain technology being harnessed by other countries and regions in the world and, instead, it will adopt its own approach to such technology that will embrace Web3.

Hong Kong

Distinct from mainland China, the Hong Kong government on the other hand has taken a more liberal position in regard to crypto business. Although, due to its lack of an ecommerce ecosystem, it did not experience much of a Fintech revolution at the Web2 stage, Hong Kong, as one of the major global financial centres, has been providing ‘crypto-friendly’ regulatory policy that accommodates Web3-based crypto business ever since. Its intention to be an optimal destination for crypto or Web3 business is even more obvious when compared with the approach being taken in Singapore, which also became a magnet for crypto ventures a long time ago and recently hosted the Token2049 event. Nonetheless, in terms of the actual transaction volume and the statistics associated with crypto trades in Asia, Hong Kong, the ‘Wall Street of Asia’, may have arguably overtaken Singapore in this regard, but, in terms of the broader global market, its trading volume falls way behind that of the US, particularly after stablecoins came into existence. Despite all its good intentions and efforts to embrace the Web3 evolution, Hong Kong, being a hub for traditional financial institutions, a major financial talent pool and a place with a centuries-long deeply rooted mindset of ‘centralised and compliant’, faces certain challenges, such as a lack of technicians and innovators, an incomplete crypto ecosystem, no 'crypto-native’ spirit and, more significantly, a lack of knowledge and expertise on how to best to integrate this technology into its traditional financial centre, with stablecoins still seen as infamous ‘kryptonite’ or the inherently natural enemy to centralised traditional banking and finance. Of note, up to October 2025, reportedly nine crypto exchange licences had been issued, with licence holders making much less profit than their US counterparts after subtracting the compliance costs and expenses incurred while operating in Hong Kong. In addition to the less impressive transaction volume compared to the US market, firms have also experienced further setbacks with the arrival of the Hong Kong stablecoin rule, which became effective in the middle of 2025, on the grounds that the new rule finalises the definition of ‘legal’ stablecoin activities and, incidentally, has had the effect of determining what is not legal and, accordingly, prohibits those activities that do not fall within the defined standard. Against this backdrop, applications for issuer licences have reportedly been suspended. Nonetheless, the Hong Kong government will take the position of ‘fully reserved and backed + licensed business’ that aims to regulate stablecoin business, while making policy adjustments from time to time to resolve any challenges, promote innovation and preserve the vitality of crypto business activities.

China’s stance on stablecoins and its concerns

Instead of embracing stablecoins, China's participation in cryptocurrency business will most likely happen in the form of the digital yuan, e-CNY or via the adoption of a central bank digital currency (CBDC) model, although decentralised finance (DeFi) may occur in regard to transactions or trades involving high frequency payments and those involving small amounts, as a supplement to the dominant e-CNY system. Despite the proliferation of USDC, USDT or other USD pegged stablecoins, China has no intention of participating in the alleged crypto ‘arms race’ cited by some media outlets, but will focus on using the new technology to upgrade its financial system and infrastructure, and will develop policy with the utmost prudence based on the principle of ‘compliance first and innovation later’, so as to ensure financial stability, currency sovereignty and sustainable development.

During two major events in 2025, Pan Gongsheng, the governor of the People's Bank of China, expressed the country’s willingness to embrace Web3-based financial technological innovation, but explained that it would be in the form of the digital yuan, e-CNY or CBDC model. In his second speech, later in 2025, the central bank governor emphasised the concerns raised by finance ministers and central bank governors from various countries during the IMF World Bank Annual Meeting held in Washington DC in mid-October 2025 in relation to a series of challenges that stablecoins as a financial instrument cannot effectively solve at this stage. For example, stablecoins fail to effectively meet know-your-customer (KYC) and anti-money laundering (AML) requirements, which means that they could be used for the purposes of money laundering, illegal cross-border asset transfers and terrorism financing. In addition to this, there are concerns that the adoption of such financial instruments will cause a fundamental shift in the global financial system and raises concerns about the need to preserve the currency sovereignty of less developed economies. Although countries across the globe have been actively engaging in related legislative initiatives, improving regulatory controls and forming relevant standards, various challenges and issues remain in areas such as setting adequate global or domestic standards, ensuring the effectiveness of regulatory scrutiny, and the implementation of effective enforcement action and penalties. This gap in the regulatory landscape has led to the occurrence of criminal activities, such as money laundering, the movement of illegal capital and terrorism financing, and mainstream crypto exchanges have reportedly become a ‘highway’ for the circulation of criminal funds. In addition, if stablecoins have deeply penetrated the market without proper regulation, there are rising concerns about its implications in terms of the replacement of legal tender and even a country’s local currency as a result of the widespread use of foreign stablecoins. This situation will seriously impact the central bank's control over the issuance of local currency and its ability to regulate the economy through monetary policy. Once regulatory controls and the traditional financial system are bypassed, systemic financial risks may arise, for instance, situations may occur that are similar to the de-pegging event involving USDC that occurred in 2023 and USDe and USDX in late 2025, and the shocking PYUSD over-issuance event that occured in October 2025, when 300 trillion unbacked stablecoins were accidentally minted due to a ‘technical error’, all of which suggest that stablecoins are no longer that ‘stable’. Afterall, even the fiat-collateralised stablecoin, seemingly the most stable type of stablecoin and the backbone of the mainstream global Web3 payment system at the moment, is issued by private institutions without the backing of central banks. One may ask the question: how ‘stable’ they can be?

China’s e-CNY

Facing a series of challenges brought about by stablecoins, there are also various reasons that China has chosen to adopt an e-CNY or CBDC model, as outlined below.

In regard to its technical attributes, similar to stablecoins, the e-CNY (or China's CBDC) is also based on blockchain and distributed ledger technology, with tamper-proof, transparency and traceability advantages. Further, due to the adoption of a two-tier operation system, it enables offline payment operations without the need for a network connection.

However, from the perspective of its financial attributes, the e-CNY is a legal tender by nature, issued by the People's Bank of China and backed by national sovereign credit, but digitised through the adoption of blockchain and distributed ledger technology. It is controversial as to whether cryptocurrencies should be classified as currencies in the traditional sense, securities or commodities and, accordingly, distinct legal treatment has been applied in this regard in various jurisdictions. For example, in the US, Securities and Exchange Commission (SEC) chair, Paul Atkins, declared in 2025 that “most crypto-assets are not securities”, while in mainland China, crypto activities are banned in their entirety without having to address the nature of their classification, although it is certain that stablecoins and cryptocurrencies do not constitute legal tender under Chinese law.

To constitute a currency in the traditional sense, value, stability and security are typically required. Looking at stablecoins, the value can be determined by the collateral reserves deposited by private institutions, but its stability and security are at risk for now, despite continued effort to regulate these aspects, for example, the ‘de-pegging’ risks caused by market fluctuations, the dependence on the credit of the private institute issuer and custodians to maintain the stability and security of stablecoins, challenges regarding the disclosure and authenticity of reserve assets and the collapse of private institutions, such as Silicon Valley Bank. Further, regulatory scrutiny of stablecoins can only be conducted externally, and whether these scrutiny standards are unified and properly established, and whether there is adequate manpower and effective enforcement to ensure the proper monitoring of such assets, are all questionable. These are the innate risks associated with handing over the power of currency issuance to private institutions, which fundamentally affects the national economy, financial stability and public wellbeing in a given jurisdiction.

In this context, the e-CNY, being a digital currency issued by the central bank pursuant to Chinese law, ensures that the value, stability and security of the currency is maintained. It represents a digital transformation in the field of currency and payments under the premise of neither changing the existing monetary and financial system framework nor bypassing financial regulatory scrutiny or altering the existing financial logic, regulatory framework, monetary policy or economic order in China. Such a transformation leverages blockchain and distributed ledger technology to enhance the efficiency, security, stability of payment and settlement processes; upgrades the financial system in regard to aspects such as currency production, cash transportation, storage, calculation and usage; as well as contributing to the development of commercial and civilian activities. China’s e-CNY is a next-generation currency and involves the digitalisation of fiat currency, which does not deviate from the natural trajectory of the historical evolution of currency, from the use of shells to metals and then to the exchange of paper currency.

Moreover, from the standpoint of preventing systematic risk, particularly those risks associated with stablecoins that have been discussed at length above, the e-CNY does not bypass existing regulatory scrutiny, or threaten monetary sovereignty or monetary policy, and, accordingly, it is better positioned to prevent or mitigate such risks. By representing the currency power of the central bank and having been integrated into the national financial regulatory system, the digital yuan presents obvious advantages over stablecoins in terms of getting a handle on various core exposure and compliance issues. For example, the e-CNY can be used to track the flow of funds in real time, strictly monitor transactions and, as a result of its ‘controllable anonymity’ design, it performs better in regard to key risk prevention functions regarding Web3 transactions, such as in regard to AML, KYC, and anti-terrorism financing, as well as the prevention of fraud and other criminal activities.

China’s Web3 application

In light of the adoption of the e-CNY and CBDC model, it is also worth exploring how Web3 technology may be applied in China, both domestically and beyond.

Domestically in mainland China, prior to the emergence of the e-CNY, due to the over a decade long growth of e-commerce and online trade, the market penetration of digital payment services providers (PSPs) (such as Alipay and WeChat Pay, commonly categorised as ‘third-party payment services’) has been rather high. However, PSPs themselves do not issue any form of currency, whether legal tender or cryptocurrency, and their respective ecosystem and infrastructure have been created and developed based on the existing traditional financial system. All of the measures adopted by such PSPs in regard to AML, large-sum suspicious transactions clearance, KYC, anti-terrorism financing and other compliance requirements, have been integrated and synchronised with the traditional financial system. Therefore, the issue raised for PSPs as a result of the e-CNY in the context of the existing digital PSP third-party payment system is more about their integration and coexistence in terms of the user experience and usage habits at the application end. Although digital payments carried out by PSPs have been widely utilised for a long time, there are some advantages brought about by the e-CNY system that can further upgrade the digital payments industry in China. For example, the e-CNY system allows offline payment settlement without the need for a network connection and, accordingly, can optimise the payment experience. Also, there are a large number of people in China who have not yet opened or maintained a bank account, and the e-CNY system enables payment and settlement without the need to be linked to a bank account. In addition, the e-CNY system produces a variety of positive results in regard to reducing operation costs and increasing efficiency in terms of operational aspects, such as the printing of currency, cash transit, storage, security and other aspects, as mentioned above. It is expected that the new e-CNY system and the existing PSP payment system will coexist for a considerable period of time. Having said that, attention may need to be paid to the fact that the e-CNY is currently being converted from M0 to M1 in nature starting from 1 January 2026, based on the latest policy issued by the People's Bank of China. Making use of its programmability and smart contract attributes, as well as other technical advantages, this may well result in a far more significant evolution to the payment system and the financial sector than a mere technical manoeuvre. 

In situations involving cross-border activities where the settlement of funds involves multiple clearing and correspondent banks and the SWIFT system, the blockchain technology-based e-CNY system arguably presents more advantages and benefits than domestic applications in terms of reducing settlement costs and time, increasing efficiency, and preserving the independence and autonomy of cross-border payments. Accordingly, while stablecoins are widely used for cross-border payments in the global market due to their high efficiency and cost-effectiveness, the reason that China chose to adopt the e-CNY system over stablecoins as the key instrument in the cross-border transactions is primarily attributed to the necessity to preserve fundamental values, such as currency sovereignty and financial stability, as well as strong protections against money laundering, terrorism financing and other illegal activities. In addition, it is worth noting that China is a country that applies foreign exchange controls, and the inflow and outflow of capital is regulated by authorities such as the State Administration of Foreign Exchange and the People's Bank of China. To that end, in light of the absence of foreign exchange controls in the US, financial innovation involving stablecoins or similar DeFi instruments runs relatively smoother in the US than China. China’s long-standing foreign exchange control policy is also expected to be applied in the case of e-CNY cross-border flows, although a distinct regulatory network or infrastructure may be deployed to regulate such blockchain technology-based digital currency pursuant to the CBDC model. Platforms like mBridge may be used for that purpose.

The future global payment landscape

Despite earlier rumours about the potential softening of restrictions or even a possible reversal of its stance on crypto by allowing the use of RMB-based stablecoins, the questions about China’s final take on whether and how to embrace Web3 technology from the perspective of its national currency and financial innovation have been answered by the country’s recent choice to adopt the e-CNY or CBDC model with Chinese characteristics. However, in terms of its trading volume, it is way behind the mainstream US-dollar-backed stablecoin that reportedly makes up about 90 per cent of the global stablecoin market and continues to grow. It is obvious that China and the US have embarked on a rather distinct Web3 journey. With other countries also developing central bank-backed CBDCs, market-driven stablecoins or hybrid models, what the future global payment landscape may look like has become a matter of great controversy. For example, questions remain as to whether a unified global payment system involving USD-denominated stablecoins will remain as the dominant currency or whether a fragmented or decentralised global model appear.

Unfortunately, there is no clear answer at the moment. What the future holds may depend on various elements. For instance, some people argue that in the long run the reigning trend concerning a multi-polar new world order may ultimately decide the future instead of changes merely due to the influence of technological advancements and trading volumes. Also, because payments serve the underlying trade and trade can now benefit from Web3 technology, transaction parties may now choose at their will to take part in decentralised, fragmented and regional networks instead of having to rely on a single or unified network. There are also influences arising from geopolitical complications, regarding national strategic needs, monetary sovereignty and payment autonomy, particularly considering the concerns about the fact that without adequate regulatory controls, such technology enables digital currency to bypass government control and reach individuals directly in any jurisdiction. Nonetheless, despite the famous Web3 paradox concerning the decentralisation of control while mitigating risks, it will be interesting to observe how this technology continues to shape our future.