Clarify the four - fold attributes of stablecoins.
Recently, there has been significant controversy in all sectors of society regarding the fundamental questions of what stablecoins are and what functions they possess. This article will start from the product positioning and business model of stablecoins and clarify the four major attributes of stablecoins through comparative analysis.
Overall, stablecoins are a combination of crypto - assets, central bank digital currencies, third - party payments, and money market mutual funds:
Technologically, stablecoins rely on technologies such as blockchain and distributed ledgers used in crypto - assets and have the attribute of decentralized transactions. However, the issuance of mainstream stablecoins is centralized.
In form, like central bank digital currencies, stablecoins are promoting the tokenization process of fiat currencies. However, the issuance of stablecoins does not create new money.
In function, stablecoins mainly perform payment functions similar to third - party payments. However, they achieve "payment - on - settlement" and focus on cross - border payment and settlement rather than domestic consumption payments.
In value, stablecoins have value - stability characteristics similar to money market mutual funds. However, there are obvious differences in the income distribution mechanisms behind the two.
The aggregation of these functions endows stablecoins with a unique market positioning and opens up application scenarios for stablecoins.
Pan Gongsheng, the governor of the People's Bank of China, proposed at the Lujiazui Forum in June this year that emerging technologies such as blockchain and distributed ledgers have promoted the vigorous development of central bank digital currencies and stablecoins, reshaping the traditional payment system from the bottom up. Since then, discussions on stablecoins in all sectors of society have become more intense. However, due to differences in understanding of some basic issues, there are also relatively large disputes. For this reason, the author wrote an article titled "Clarifying Six Misunderstandings about Stablecoins" in the China Business News in June, pointing out that stablecoins are different from general crypto - assets, their value is not unstable, and they can coexist with central bank digital currencies. Under the corresponding regulatory system, stablecoins will not damage the domestic monetary sovereignty, nor will they increase the risk of illegal financial activities, and they are beneficial to the internationalization of the domestic currency (see "Clarifying Six Misunderstandings about Stablecoins" for details). After the article was published, it played a certain role in promoting an objective and rational understanding of stablecoins.
Recently, there is still significant controversy in all sectors of society regarding fundamental questions such as what stablecoins are and what their basic attributes are. Some views equate stablecoins with general - purpose cryptocurrencies, while others believe that both stablecoins and central bank digital currencies are tokenizations of fiat currencies. A recent report by the Bank for International Settlements (BIS) analyzed the deficiencies of stablecoins from the perspective of money. However, some views hold that stablecoins are not money but a new type of payment tool; others believe that stablecoins are money market mutual funds traded on the blockchain. Although these disputes are fundamental, they are very important. If not clarified, it will be difficult to reach a consensus on policy discussions about whether to develop stablecoins, what risks they pose, whether they affect monetary policy regulation, and how to regulate them.
For this reason, this article will start from the product positioning and business model of stablecoins and clarify the four major attributes of stablecoins through comparative analysis. Overall, stablecoins are a combination of crypto - assets, central bank digital currencies, third - party payments, and money market mutual funds. Technologically, they rely on technologies such as blockchain and distributed ledgers used in crypto - assets and have the attribute of decentralized transactions. In form, like central bank digital currencies, they are promoting the tokenization process of fiat currencies. In function, they mainly perform payment functions similar to third - party payments, and in value, they have value - stability characteristics similar to money market mutual funds. The aggregation of these functions endows stablecoins with a unique market positioning and opens up application scenarios for stablecoins. As the regulatory frameworks of various countries become clearer, it is expected that stablecoins will play an increasingly important role in the global monetary and financial system in the future.
I. Technical Architecture and Operating Model of Stablecoins
From a technical architecture perspective, stablecoins are issued based on public blockchains to ensure their decentralization and anonymity features. Taking USDT as an example, we can have a general understanding of the technical stack of stablecoins: The first layer is the Bitcoin blockchain as the public blockchain. The transaction ledger of Tether, the issuer of USDT, is embedded in the Bitcoin blockchain as metadata through the consensus system Omni. This is the core of stablecoin decentralization. Issuing on an open public blockchain can achieve peer - to - peer and anonymous decentralized transactions. Currently, the underlying public blockchains for USDT issuance also include multiple blockchains such as Bitcoin, Ethereum, and Tron. Recently, Tether also released its own L1 public blockchain, Stable, for USDT. The second layer is the Omni Layer protocol layer, which is used to grant (create) and revoke (destroy) the digital token USDT, track and report the circulation of USDT, and support users to conduct peer - to - peer transactions and store USDT and other crypto - assets and tokens through encrypted network wallets, Omni wallets, etc. The third layer is the application system. Tether accepts fiat currency and issues USDT, pays fiat currency and withdraws (destroys) the corresponding USDT, manages the integration of blockchain wallets, exchanges, and merchants, and operates network wallets for sending, receiving, storing, and converting USDT.
From an operating model perspective, mainstream stablecoins are issued centrally by the issuer, and users can trade freely after issuance. Taking USDT as an example, from the perspective of capital flow, its operating model includes five main links: 1) Users deposit US dollars into Tether's bank account; 2) Tether creates USDT for users at a 1:1 value ratio and simultaneously entrusts and invests the reserve funds; 3) After USDT enters circulation, it can be freely traded between any enterprises or individuals. Users can trade through crypto - exchanges or conduct peer - to - peer transactions in the over - the - counter market; 4) Users deposit USDT into Tether's corporate account to redeem US dollars. Users can also redeem US dollars through secondary - market transactions on crypto - exchanges; 5) Tether destroys USDT and pays US dollars to customers. From this, it can be seen that the issuance of stablecoins is centralized, and the issuer is the only entity that can put stablecoins into circulation (create) or withdraw them from circulation (destroy). However, after issuance, as a payment tool, stablecoins can be freely traded among users, and payments do not require a centralized payment and settlement institution.
From the perspective of the stablecoin mechanism, the issuer implements strict custody and investment management of reserve funds to ensure value stability. After the issuance of stablecoins, maintaining the value stability of stablecoins is of utmost importance, and the key lies in the investment management of reserve funds. According to the current regulatory frameworks of various countries, first, the stablecoin issuer will entrust the fiat currency (reserve funds) purchased by users for stablecoins to an independent licensed institution for custody; second, the stablecoin issuer will entrust an investment manager to invest according to the asset categories set by regulations (mainly high - credit - grade and highly liquid assets such as short - term treasury bonds, money market mutual funds, and bank deposits); in addition, the stablecoin issuer will hire a licensed accounting firm to conduct independent audits of the overall scale and investment structure of the reserve funds regularly and publicly release the results. From this, it can be seen that the custody, investment, and audit of stablecoin reserve funds are also centralized, and the prudent investment management of reserve funds is the key to maintaining the value stability and solvency of stablecoins.
II. Similarities and Differences between Stablecoins and Crypto - assets
Both are issued based on blockchain technology and distributed ledger technology at the bottom layer. Different from traditional databases controlled by a central administrator for data storage, a distributed ledger is a synchronous database system that is not maintained by any unit, organization, or individual. Instead, each node in the network automatically constructs and records information separately, and account information is visible to any network member. Blockchain is one of the implementation forms of distributed ledgers. It records transactions and information through a series of interconnected blocks and uses cryptography and consensus mechanisms to ensure the security of data and the credibility of each other. Crypto - assets such as Bitcoin and Ethereum operate based on decentralized ledgers and use a public - chain architecture at the bottom layer. Without the control of a central institution, decentralized governance and verification are achieved through the consensus mechanism. As analyzed above, stablecoins such as USDC and USDT are also issued based on decentralized public blockchains, have good openness, support controllable anonymity, can conduct direct peer - to - peer transactions, and naturally have cross - border attributes.
The centralization degrees of the issuance and management mechanisms of stablecoins and crypto - assets are different. Native crypto - assets such as Bitcoin and Ethereum are issued and traded on public blockchains and are usually considered to be completely "decentralized." This means that no single entity or institution controls the issuance, trading, and verification processes of these assets. All participants have equal rights and obligations on the network and can participate in transactions without relying on a central institution, jointly maintaining and verifying transaction records. Stablecoins, on the other hand, although also operating on a blockchain - based distributed ledger, can embed smart contracts, support lending and trading in decentralized finance (DeFi), and automatically achieve settlement without the need for traditional financial intermediaries. However, for mainstream fiat - backed stablecoins, their creation and destruction are centrally completed by the issuer. At the same time, the custody and investment management of stablecoin reserve funds are also centralized, only the transactions are decentralized.
Taking USDC as an example, it is issued centrally by Circle. All issued and circulating USDC stablecoins are fully supported by equivalent US - dollar - denominated assets, which are stored in segregated reserve accounts and can be redeemed for the corresponding US dollars at a 1:1 ratio. At the same time, Circle established the Circle Reserve Fund to manage the USDC reserve funds, hired the Bank of New York Mellon (BNY Mellon) as the main asset custodian of the fund, and entrusted the reserve funds to Blackrock, the world's largest asset management institution, for management.
The value - stability mechanisms and stability degrees of stablecoins and crypto - assets are different. Native crypto - assets such as Bitcoin and Ethereum are issued and traded on public blockchains and are usually considered to be completely "decentralized." This means that no single entity or institution controls the issuance, trading, and verification processes of these assets. All participants have equal rights and obligations on the network and can participate in transactions without relying on a central institution, jointly maintaining and verifying transaction records. Stablecoins, on the other hand, although also operating on a blockchain - based distributed ledger, can embed smart contracts, support lending and trading in decentralized finance (DeFi), and automatically achieve settlement without the need for traditional financial intermediaries. However, for mainstream fiat - backed stablecoins, their creation and destruction are centrally completed by the issuer. At the same time, the custody and investment management of stablecoin reserve funds are also centralized, only the transactions are decentralized.
Different from this, the value of stablecoins fluctuates very little, and they are mainly used as payment tools. Currently, stablecoins include fiat - backed stablecoins (such as USDT and USDC), crypto - backed stablecoins (such as DAI), stablecoins backed by bulk assets such as gold (such as PAXG), and algorithm - based uncollateralized stablecoins (such as FRAX). Among them, fiat - backed stablecoins account for more than 95% of the market value. They are supported by 100% reserve assets, and their value is pegged to fiat currency at a 1:1 ratio, with very little price fluctuation in normal times. For this reason, stablecoins are mainly payment tools and do not have much investment value themselves.
III. Similarities and Differences between Stablecoins and Central Bank Digital Currencies
Both central bank digital currencies and stablecoins are tokenizations of fiat currencies. The issuance of stablecoins involves using fiat currency (including base money and bank deposits) to purchase stablecoins from the issuer. Stablecoin holders can exchange stablecoins back into fiat currency at any time as needed. In this process, the stablecoin issuer provides 100% reserve support for stablecoins, does not cause an increase in base money, and cannot issue loans. Purchases and redemptions will bring corresponding changes in bank account funds. Therefore, the issuer does not create money, and there is no problem of sharing seigniorage. This shows that stablecoins are tokenizations of fiat currency transferred to the blockchain for trading, similar to central bank digital currencies (CBDC). They only change the form of money, improve the circulation and trading efficiency of fiat currency, and do not create new money.
Recently, the BIS released a research report titled "The Next - Generation Monetary and Financial System," which analyzed and pointed out based on three criteria of singleness, elasticity, and integrity of money that stablecoins have significant deficiencies as money and are not the pillar of the future monetary and financial system. However, if stablecoins are only tokenizations of fiat currency and are positioned as a new type of payment tool based on fiat currency (see later), and do not create money for real - economy transactions, then the above - mentioned analysis and judgment of the BIS are undoubtedly overly strict. In addition, the BIS research report's analysis of the risks and integrity of stablecoins is somewhat outdated and does not consider the construction of the stablecoin regulatory system actively promoted by various countries since 2025 and its positive impact on the stable operation of the stablecoin market.
The issuing entities of the two are different, and there are differences in legal tender effectiveness. CBDC is the tokenization of fiat currency launched by central banks of various countries, but no collateral assets are required in the issuance process. The issuance process of CBDC is the process of money creation. For example, the retail - type CBDC launched by various countries (such as the digital RMB) is mainly used in domestic fields such as living expenses payment, catering services, transportation, shopping consumption, and government services, and has the same legal tender, mandatory, and general - purpose nature as the basic fiat currency. Fiat - backed stablecoins are the tokenization of fiat currency promoted by market institutions. Their business logic is not based on legal tender coercion or national credit but on 100% asset collateral. Among them, the issuer's fund management ability, payment performance ability, and compliance operation mechanism are very important. Therefore, the acceptance scope of stablecoins is determined independently by market entities. If the issuer goes bankrupt, holders may still face the possibility of being unable to redeem stablecoins.
The underlying technologies of the two are different, and there are differences in transaction and payment efficiency. The CBDC currently being tested by central banks of various countries still has a centralized account system as the main technical architecture, and only private/consortium blockchains and distributed ledger technologies are used in local links. The central bank is still the central control and settlement entity. For example, the digital RMB in China has a layered processing of the underlying system. The core system uses a centralized traditional architecture to achieve high performance, and at the same time, a distributed ledger is used to ensure the consistency of the central bank and commercial banks in the ownership information of central bank digital currency. The underlying technologies of stablecoins include public blockchains and smart contract technologies. The decentralization feature of public blockchains allows stablecoin transactions to be directly conducted between peers without going through traditional financial institutions or third - party clearing institutions. Therefore, stablecoins have obvious advantages in payment, and cross - border payments can also achieve "payment - on - settlement." The longest settlement time will not exceed 1 hour, and the average cost of sending stablecoins on many high - performance blockchains is less than 1 US dollar.
The CBDC of some countries will be impacted by foreign - currency stablecoins. In some countries with relatively high inflation and the risk of fiat - currency depreciation, stablecoins have to some extent replaced the domestic currency. Especially in countries where residents have difficulty obtaining US dollars through formal channels, US - dollar stablecoins are regarded as a substitute tool similar to hard currency. The results of a survey by VISA in September 2024 in Brazil, India, Indonesia, Nigeria, and Turkey showed that stablecoins have been widely used in fields such as currency substitution, payment for goods and services, cross - border payments, and salary payments. For this reason, Zhou Xiaochuan, the former governor of the People's Bank of China, said at the Lujiazui Forum recently that we should be vigilant against the dollarization impact of US - dollar stablecoins on the monetary systems of other countries.
In addition, CBDC and domestic - currency stablecoins can achieve common development. In October 2022, the Hong Kong Monetary Authority cooperated with the BIS Innovation Hub to launch the Aurum project, actively exploring a model in which decentralized - trading stablecoins and centrally - managed central bank digital currencies operate together. Under this project, a digital - currency system in which central bank digital currency and stablecoins operate in a mixed manner was designed. Two different types of tokens were established at the wholesale level - intermediary CBDC (direct liability of the central