As rumors circulate that China intends to promote a 'Renminbi Stablecoin', Zhou Xiaochuan, former governor of the People's Bank of China (central bank), issued warnings about the potential risks of stablecoins from '6 major perspectives', especially urging the central bank to be wary of the risks of 'excessive currency issuance' and 'high leverage amplification'.

"The China Financial Forty Forum" published on the 27th an article titled "Multidimensional Examination of Stablecoins", featuring Zhou Xiaochuan's remarks from a closed-door seminar in July. Zhou Xiaochuan stated that the current discussions about stablecoins only start from a single perspective, and to extrapolate the operation and future prospects of stablecoins, a multi-perspective examination is needed.

1. Central Bank Perspective: Preventing excessive currency issuance and high leverage amplification

Zhou Xiaochuan pointed out that from the central bank's perspective, there are two major risks that stablecoins should be wary of: first, the issuer 'excessively issues (overissues) currency' without sufficient reserves; second, there is 'high leverage amplification', meaning that the operation after issuance will create a multiplier amplification effect of currency derivation.

Zhou Xiaochuan mentioned that some stablecoin issuers may lack sufficient reserves and even generate a multiplier effect through deposit and loan, collateral, and asset trading, leading to a run risk far exceeding the reserve capacity, with existing rules being insufficient to cope with derivation and amplification.

He believes that the custody of stablecoin reserves should be handled by the central bank or a central bank-approved institution; otherwise, it would be difficult to assure safety. Additionally, regulators need to statistically and mathematically analyze the actual circulation volume of issued stablecoins; otherwise, it is impossible to ascertain the potential scale of redemption risk. The amplification multiplier effect of stablecoins will also provide opportunities for fraud and market manipulation.

2. Financial Service Model Perspective: The real needs for decentralization and tokenization

In terms of financial service models, Zhou Xiaochuan reminded that the outside world needs to calmly assess the actual needs for 'decentralization' and 'tokenization'. He emphasized:

Not all types of financial assets are suitable for tokenization, and not all financial service segments are suitable for decentralization.

Zhou Xiaochuan illustrated that retail payments in China and Asia have already achieved high efficiency through mobile payments, digital RMB, and cross-border rapid payments. As of now, the centrally managed account system still demonstrates good applicability, and the argument for replacing account-based payment systems with full tokenization lacks sufficient basis.

3. Payment System Perspective: Technical pathways and compliance challenges

Regarding the upgrade of the payment system, Zhou Xiaochuan believes that efficiency is not the only consideration; security and compliance must also be taken into account. Compliance aspects such as identity verification (KYC), anti-money laundering (AML), and counter-terrorism financing (CFT) are challenges that stablecoins must face. He stated that, at present, stablecoin payment services still have significant compliance shortcomings.

4. Market Trading Perspective: Market manipulation and investor protection

In terms of market trading, Zhou Xiaochuan reminded that there have already been cases of price manipulation and fraud in the stablecoin market. However, under the improved current institutional framework, whether it's the United States (Genius Act), relevant regulations in Hong Kong, or regulatory requirements in Singapore, these issues have not yet been adequately addressed.

Zhou Xiaochuan pointed out that if market manipulation cannot be effectively prevented and unqualified investors are attracted to enter the market, the risks will further escalate.

5. Micro-behavior Perspective: Motivations of various participants

At the micro-behavior level, Zhou Xiaochuan noted that stablecoin issuers are mostly profit-driven commercial institutions, yet some functions within the payment system are basic infrastructure and public services that should not be entirely dominated by commercial interests.

He believes that it is necessary to examine the motivations of various participants and clearly define which areas are suitable for market entities and which belong to infrastructure. At the same time, there should be vigilance against the excessive use of stablecoins for asset speculation, as directional deviations may lead to fraud and instability in the financial system.

6. Circulation Path Perspective: The cyclical mechanism from issuance to recovery

Finally, Zhou Xiaochuan reminded that if there is a lack of sufficient demand scenarios, stablecoins may not enter effective circulation, meaning they might obtain an issuance license but fail to issue; if the main line of payment is not smooth, the main pathway for stablecoins to enter circulation will overly rely on speculation in virtual assets, leading to concerns about health.

Furthermore, whether stablecoins are used as a temporary payment medium during transactions or as a value preservation tool for a certain period will affect the amount of stablecoins remaining in the market after issuance.

"Is the 'Renminbi Stablecoin' about to emerge? Zhou Xiaochuan comprehensively analyzes the risks from '6 major perspectives'". This article was first published in (Blockchain Customer).