China prohibits Crypto Assets, but allows RMB stablecoin?

For a long time, China's attitude towards Crypto Assets has been one of strict prohibition policies, especially in 2021 when it fully banned Crypto Assets trading and Mining, leaving a deep impression on the global Crypto community. However, recent unexpected news has emerged: China's IT giants are actively laying out plans for the stablecoin market and are planning to launch a stablecoin based on the Renminbi. At the same time, the United States is also accelerating its stablecoin legislation. This inevitably raises the question of whether China and the U.S. will face a new competition in the global stablecoin market. Moreover, is China's iron-fisted policy towards Crypto Assets quietly opening a window for the development of Renminbi stablecoins?

1. Chinese Tech Giants Promote the Issuance of RMB Stablecoin: Countering Dollar Hegemony

According to a Reuters report on July 4, China's two major IT giants—JD.com and Ant Group, a financial subsidiary of Alibaba—have submitted applications to the People's Bank of China, hoping to be permitted to issue a renminbi stablecoin. Their goal is clear: to counter the growing influence of dollar-denominated crypto assets and to promote the global use of the renminbi.

The two companies proposed to issue a stablecoin linked to the offshore renminbi in Hong Kong. This move aligns with the stablecoin regulatory framework that Hong Kong is set to launch on August 1, following the implementation of its virtual asset trading system in 2023. This indicates that Chinese enterprises are seeking development space for stablecoins within a compliant framework.

Some analysts believe that China's previous hardline stance against Crypto Assets may be changing. Last month, Pan Gongsheng, the governor of the People's Bank of China, commented: "Stablecoins could fundamentally change international finance and expose the vulnerabilities of existing payment systems under geopolitical tensions."

Professor Huang Yiping from Peking University and former member of the monetary policy committee of the People's Bank of China also stated: "Issuing offshore RMB stablecoins in Hong Kong is a possibility."

2. The Expansion of the US Dollar Stablecoin: A New Challenge for the Internationalization of the Renminbi

The motivation for large Chinese technology companies to enter the stablecoin market mainly stems from the rapid growth of the issuance of stablecoins pegged to the US dollar globally. Currently, over 99% of stablecoins issued worldwide are denominated in US dollars, which is seen by China as a potential threat to the internationalization of the renminbi.

Wang Yongli, former vice president of the Bank of China and co-chairman of Digital China Holdings Limited, recently stated: "The expansion of the US dollar stablecoin poses a new challenge to the internationalization of the Renminbi," and warned that "if the international settlement of the Renminbi is not as efficient as that of the US dollar stablecoin, it could pose strategic risks."

According to reports, many Chinese export enterprises have recently received payments from trade partners not in Renminbi, but in the dollar-pegged stablecoin USDT (Tether). The reasons behind this are complex, including China's strict capital controls, geopolitical risks, and the volatility of certain emerging market currencies.

3. The Interaction Between Renminbi Stablecoin and CBDC: The Role of mBridge

The industry also anticipates that the central bank digital currency (CBDC) settlement project "mBridge" may connect with the renminbi stablecoin. mBridge is a multi-national central bank digital currency (CBDC) settlement platform jointly promoted by central banks from China, Hong Kong, Thailand, the UAE, Saudi Arabia, and others.

The project was launched in 2021, aiming to technically empower cross-border CBDC transactions and promote cooperation. Josh Lipsky, the CBDC tracking director at the American think tank Atlantic Council, commented: "Using mBridge technology, the settlement of the renminbi with Saudi Arabia's oil will be further accelerated." In a test last February, the system transferred funds from Abu Dhabi Bank in the UAE to Bank of Beijing in just 10 seconds, settling faster than the traditional SWIFT network, demonstrating its efficiency.

Recently, JD emphasized in talks with the People's Bank of China that the peg between the Hong Kong dollar and the US dollar is detrimental to the internationalization of the renminbi. According to reports, JD suggested launching an offshore stablecoin based on the renminbi in Hong Kong first, and then expanding to the offshore market of China's free trade zone. If these measures are allowed, the cross-use of central bank digital currencies and renminbi stablecoins between Hong Kong and the mainland may become a reality. For example, payments can be made in digital renminbi in mainland China (remittance), and received in equivalent renminbi stablecoins in Hong Kong, and vice versa; Hong Kong's renminbi stablecoins can also be exchanged for digital renminbi. Such cross-border settlements can be achieved by incorporating renminbi stablecoins into multilateral networks like mBridge.

4. Potential Challenges and Geopolitical Risks: Escalating Tensions between China and the United States?

However, some are concerned that the RMB stablecoin issued by Chinese capital may exacerbate tensions between China and the United States. The U.S. may view China's financial instruments (RMB stablecoin) as a challenge to the dollar system and impose restrictions. For instance, the U.S. Treasury may sanction RMB stablecoins issued on overseas platforms (if used as a channel for evading sanctions or money laundering) along with the relevant institutions or networks. The U.S. previously sanctioned Iran's Petro in 2019 and crypto assets like Tornado Cash in 2022, demonstrating its zero-tolerance attitude towards the use of crypto assets to evade regulations.

This means that the development of the renminbi stablecoin is not just a matter of technology and finance, but also involves complex geopolitical games. How to promote the internationalization of the renminbi while avoiding touching on the sensitive nerves of the United States will be a major challenge faced by China.

Conclusion:

China's strict ban on Crypto Assets contrasts sharply with its potential openness towards the RMB stablecoin, creating a thought-provoking juxtaposition. This reflects China's balancing act between maintaining financial stability and promoting the internationalization of the RMB. Through technology giants issuing offshore RMB stablecoins in Hong Kong, and linking them with the central bank's digital currency project mBridge, China seems to be attempting to seek breakthroughs in the digital currency space without crossing the domestic Crypto Assets red line. However, how this global monetary X-file will ultimately evolve, and how it will affect the financial landscape of both China and the United States, as well as the world, remains to be seen over time.