Expert SpeakRaisina Debates
Published on Jul 29, 2026
Washington sees stablecoins as extending dollar power; Beijing sees them as a threat to capital controls. Both may be missing that stablecoins are increasingly beyond either government’s reach.
- Dollar-backed stablecoins are becoming a major part of global finance, but much of their activity occurs through self-custodied wallets. As a result, both Washington and Beijing face growing limits to regulatory oversight.
- The stablecoin market has surpassed US$300 billion, with many transactions occurring outside traditional banks. The key policy challenge is no longer adoption but governing finance beyond conventional oversight.
- The United States is backing regulated stablecoins while China is advancing the e-CNY, yet both strategies face the same constraint: stablecoins’ appeal lies in operating outside traditional financial intermediaries.
Washington views stablecoins as a means of extending the international role of the US dollar. Beijing, by contrast, has sought to limit their domestic use while promoting sovereign digital alternatives. Yet both approaches may underestimate a more fundamental development: stablecoins are increasingly operating outside the direct reach of either state’s traditional regulatory architecture.
Speaking at a recent gathering of central bankers in Basel, Harvard economist Gita Gopinath highlighted the scale of this shift. Around three-quarters of the outstanding supply of Tether’s USDT and Circle’s USDC—the two dominant dollar-pegged stablecoins—are reportedly held in self-custodied wallets, where users retain direct control of their cryptographic keys rather than relying on regulated intermediaries. Moreover, roughly half of all transfers occur directly between such wallets. Although public blockchains provide a transparent record of transactions, they do not inherently reveal the real-world identities of the parties involved. As Gopinath observed, stablecoins have become the principal medium for identified illicit activity within the crypto ecosystem.
Stablecoins have introduced an alternative payment rail that can, under certain conditions, bypass many of these traditional control points.
The concern extends beyond illicit finance. Over several decades, policymakers have progressively reduced opportunities for anonymous movement of capital through measures such as withdrawing high-denomination banknotes, strengthening anti-money laundering standards, and dismantling offshore banking secrecy. Stablecoins have introduced an alternative payment rail that can, under certain conditions, bypass many of these traditional control points. As their market has grown into the hundreds of billions of dollars, the policy challenge is no longer whether they are systemically relevant, but whether existing regulatory frameworks are equipped to govern financial activity that increasingly occurs beyond conventional institutional boundaries.
The Limits of Dollar Statecraft
The Trump administration has framed privately issued, dollar-denominated stablecoins as a potential extension of the US dollar’s international role, particularly in regions where conventional banking channels have limited penetration. This approach has also been framed as part of a broader effort to strengthen US leadership in digital financial infrastructure amid growing technological competition with China. The GENIUS Act, enacted in 2025, reflects this strategy by establishing a federal regulatory framework that requires licensed stablecoin issuers to maintain one-to-one backing with cash and short-term US Treasury securities.
As stablecoins become an increasingly important component of the international financial system, the policy challenge is not only to encourage their adoption but also to ensure that regulatory oversight evolves alongside new forms of cross-border digital finance.
The market has responded rapidly. By 2026, the global stablecoin market had grown beyond US$300 billion, with issuance expanding at a pace that far exceeds the growth of physical US dollar currency in circulation globally. However, this expansion also raises an important policy question. A significant share of stablecoins is held in self-custodied wallets and transferred directly between users without passing through regulated financial intermediaries. While blockchain technology provides transparency over transactions, the identities of the transacting parties are often not readily observable. Consequently, the growing international use of dollar-denominated stablecoins does not necessarily provide the same degree of regulatory visibility or supervisory oversight that traditionally accompanies the use of the US dollar through the banking system. Moreover, where stablecoins interact with centralised exchanges, these platforms may operate under a diverse range of national regulatory regimes rather than the US federal framework established by the GENIUS Act.As stablecoins become an increasingly important component of the international financial system, the policy challenge is not only to encourage their adoption but also to ensure that regulatory oversight evolves alongside new forms of cross-border digital finance.
China’s Pursuit of Digital Control
China’s position is, if anything, even more complex. While the growing use of dollar-denominated stablecoins may weaken some of the advantages traditionally associated with the US-led financial system, the very features that limit regulatory visibility also complicate China’s capital account management. Containing capital outflows remains a core policy objective for Beijing, and stablecoins provide an alternative channel through which residents can convert domestic savings into dollar-denominated digital assets, potentially circumventing existing capital controls
Research by Marco Reuter of the International Monetary Fund (IMF) illustrates the scale of this activity. He estimated gross stablecoin flows involving China at US$153 billion in 2024, roughly five-and-a-half times larger than conventional estimates. Much of this activity occurs through offshore exchanges that remain formally inaccessible from mainland China but can nevertheless be accessed through virtual private networks. The result is a digital channel for cross-border capital movement that operates largely outside the conventional architecture of capital controls. China’s policy response underscores a broader distinction between public and private digital money. Rather than encouraging privately issued stablecoins, Beijing has prioritised the expansion of the digital yuan (e-CNY), alongside supporting infrastructure such as the Cross-border Interbank Payment System (CIPS) and initiatives to facilitate cross-border central bank digital currency settlement. Unlike privately issued stablecoins, however, the e-CNY operates within a state-supervised financial architecture that preserves regulatory oversight, ensures compliance, and enables the authorities to intervene where necessary. China’s objective is therefore not simply to modernise payments, but to do so while retaining institutional control over the financial system.
Hong Kong provides an important illustration of this approach. Its new stablecoin licensing regime has initially authorised established financial institutions, including HSBC and a consortium led by Standard Chartered, to issue regulated stablecoins. Licensed issuers remain subject to customer due diligence and anti-money laundering requirements, while regulated intermediaries are required to verify the identities of both counterparties to a transaction. The framework, therefore, seeks to accommodate innovation without departing from established standards of financial supervision.
The broader economic picture also tempers many of the geopolitical claims surrounding stablecoins. Research presented by the Federal Reserve Bank of Kansas City shows that only a very small share of stablecoin holdings is used for payments at any point in time. Most stablecoins are held as digital stores of value rather than circulating as a medium of exchange. This suggests that, at present, their principal function lies less in facilitating trade or cross-border commerce than in providing users with access to dollar-denominated assets outside the traditional banking system.
Stablecoins at a Crossroads
There is a strong case for the more optimistic view, and it merits serious consideration. Stablecoins enable near-instant, low-cost cross-border transfers in ways that traditional correspondent banking, with its multiple intermediaries, delays, and transaction costs, has long struggled to achieve. This is particularly valuable for remittance corridors and economies with underdeveloped banking infrastructure. Under the GENIUS Act, licensed issuers are required to maintain one-to-one backing with cash and short-term US Treasury securities, meaning that a stablecoin market exceeding US$300 billion has also become a meaningful source of demand for US government debt.
Stablecoins enable near-instant, low-cost cross-border transfers in ways that traditional correspondent banking, with its multiple intermediaries, delays, and transaction costs, has long struggled to achieve.
In that sense, stablecoins may reinforce the international role of the US dollar through market adoption rather than state intervention. At the same time, established financial institutions are beginning to enter the market, while regulatory frameworks such as Hong Kong’s licensing regime suggest that stablecoin activity could increasingly shift towards supervised issuers operating within established compliance standards. If regulators succeed in bringing a larger share of stablecoin activity within accountable regulatory frameworks, the international use of the US dollar could expand further, including among users without access to the conventional US banking system.
The extent to which this outcome materialises will depend on regulators’ ability to gain greater visibility into a market that remains only partially observable. As Gita Gopinath has noted, a substantial share of stablecoin holdings and transactions continues to occur through self-custodied wallets outside the traditional financial system. Both the United States and China increasingly view digital currencies through the lens of strategic competition, seeking to harness technological innovation in pursuit of broader national objectives. Yet the defining characteristic driving stablecoin adoption—the ability to transact outside conventional financial intermediaries—does not align neatly with the regulatory priorities of either government. While the United States seeks to preserve the international role of the US dollar without compromising financial oversight, China prioritises innovation within a tightly supervised monetary system. The future of stablecoins will therefore depend less on geopolitical ambitions than on whether governments can develop regulatory frameworks that preserve the benefits of innovation while ensuring transparency, financial integrity, and effective oversight.
Sauradeep Bagis an Associate Fellow with the Centre for Security, Strategy, and Technology at the Observer Research Foundation.
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Sauradeep Bag
Sauradeep is an Associate Fellow at the Centre for Security, Strategy, and Technology at the Observer Research Foundation. His experience spans the startup ecosystem, impact …
