China, one of the world's strictest jurisdictions on cryptocurrency, is now considering the possibility of allowing yuan-backed stablecoins (CNY), a move that could mark a significant reversal in the country's policy.

According to information from Reuters, the Chinese government may allow the use of yuan-backed stablecoins for the first time to promote global usage. If approved, this plan would mark a significant shift in China's approach to cryptocurrency, especially after the country banned cryptocurrency trading and mining in September 2021.

This news comes amid reports showing that mainland China is gradually becoming more open to stablecoins, especially as the U.S. pushes for the use of stablecoins by 2025.

Cross-border deployment

According to sources, the State Council of China is expected to review and may approve a roadmap by the end of August to expand the global use of the yuan. This plan is said to include measures to counter U.S. developments in the stablecoin space, as well as guidelines for risk mitigation.

One potential application for yuan-backed stablecoins from mainland China could be their deployment for cross-border trade and payments with several countries.

This issue is expected to be discussed at the Shanghai Cooperation Organization (SCO) Summit, held from August 31 to September 1 in Tianjin. Hong Kong and Shanghai have been identified as priority centers for the implementation of this policy.

Yuan ranks sixth in global payments

China's potential involvement in the stablecoin market aligns with its ambitions to globalize the yuan and help it compete with major global reserve currencies like the U.S. dollar and euro. As of June, China's yuan ranked sixth among currencies used for global payments, with a market share of about 2.9%, according to data from Swift.

Previously, mainland China had been seeking new ways for foreign entities to use the yuan, amidst a 9% decline in the U.S. dollar index. The Governor of the People's Bank of China (PBOC), Pan Gongsheng, proposed a plan to 'reduce excessive dependence on a single sovereign currency' and establish a center for the internationalization of the digital yuan in Shanghai.

Dollar-backed stablecoins dominate the market

While the U.S. dollar accounts for 47.2% of total global payments, its role is much larger in the stablecoin market, where dollar-backed tokens account for nearly 98% of the total stablecoin market capitalization of $288 billion.

With President Donald Trump's commitment to expanding the global influence of the dollar through promoting stablecoins, many jurisdictions around the world, including China, have expressed concerns.

In June, an official from the PBOC acknowledged the transformative potential of emerging technologies such as stablecoins in global payment systems, thereby increasing regulatory approval requirements for stablecoins backed by the yuan. In July, Conflux, a local blockchain platform, introduced a new stablecoin backed by the Chinese yuan overseas.

Hong Kong has also taken steps towards approving stablecoins, with a specialized regulatory framework launched on August 1.