The Rise of Stablecoins: Challenges and Opportunities Coexist

Recently, the concept of stablecoin has attracted widespread attention. As a lawyer with many years of experience in blockchain legal services, I encounter related businesses and cases every day, and I feel that it is "breaking the circle".

Several recent events have been quite dramatic:

The Shanghai Municipal State-owned Assets Supervision and Administration Commission held a study meeting to discuss the development trends and response strategies of cryptocurrencies and stablecoins.

The Shanghai Pudong New Area Court announced a major case involving the use of stablecoins for cross-border currency exchange, with an amount involved reaching 6.5 billion yuan.

The U.S. President signed the "Genius Act", officially establishing a regulatory framework for digital stablecoins for the first time.

At the same time, Hong Kong is about to implement the "Stablecoin Regulatory Ordinance", becoming the world's first jurisdiction to establish a comprehensive regulatory framework for fiat stablecoins.

These events reflect that major financial centers are promoting the compliance and financialization of stablecoins, while some domestic institutions still view them as "illegal financial activities." The misalignment of regulatory pace and perceptions reminds us that it is time to re-examine the role and positioning of stablecoins.

Reasons Why Underground Money Houses Love Stablecoins

Underground money houses choose stablecoins represented by USDT as tools for cross-border currency exchange mainly because it breaks through the multiple bottlenecks of traditional currency exchange:

1. Break through the limit on the amount. By transferring on-chain, you can bypass the personal annual foreign exchange limit of $50,000, achieving large-scale cross-border transfers.

2. Reduce the pressure on the liquidity pool. There is no need to prepare bilateral positions both domestically and abroad; it is sufficient to consolidate RMB domestically.

3. Improve the efficiency of fund arrival. On-chain transfers can usually be completed within 10 minutes to 1 hour, operating around the clock.

4. Enhanced anonymity. With the help of technologies such as mixers, the connection between fund flows and real identities is severed through multiple layers.

5. Utilize regulatory differences. Complete fiat currency landing in regions with relaxed regulations to achieve cross-border regulatory arbitrage.

The involvement of stablecoins has restructured the illegal currency exchange model, significantly enhancing efficiency and concealment, and becoming a new type of infrastructure for the gray flow of cross-border funds.

The Regulatory Logic of Continuous High-Pressure Crackdowns

China's severe crackdown on virtual currency crimes is mainly based on two considerations:

First, virtual currencies are difficult for traditional regulatory systems to effectively penetrate and are easily used for illegal activities such as money laundering. The new judicial interpretation in 2024 has officially listed "transactions through virtual assets" as one of the methods of money laundering.

Secondly, as a country with foreign exchange controls, the borderless characteristics of virtual currencies can easily become a tool for evading regulation, affecting macroeconomic control and economic security. This includes:

• Causing statistical distortion, forming an "international balance of payments data black hole".
• Impact on the effectiveness of macroeconomic policies
• Lead to tax and asset loss

Since 2017, regulatory efforts have been continuously intensified. However, the reality is that the use of stablecoins in the gray market has become increasingly active. This has also fostered a group of marginal entities such as "U merchants," who are often accused of illegal operations for providing matching transactions.

Simply relying on suppression is difficult to eradicate the problem.

As a lawyer who has handled a large number of related cases, I have doubts about the effectiveness of the current methods of enforcement:

1. Those who are caught are mostly fringe figures, such as ordinary employees, "runners", etc., rather than decision-makers or actual beneficiaries.

2. The main offenders often escape abroad, making transnational law enforcement difficult.

3. National losses are difficult to recover, and the input-output ratio of judicial resources is low.

Taking the online gambling case involving 400 billion yuan in transaction volume from Jingmen, Hubei as an example, it has lasted for two years and consumed a large amount of human and material resources, but the actual amount recovered is far below expectations. A large number of the involved assets are stored overseas, making it difficult for Chinese law enforcement agencies to effectively reach them.

This fragmented approach to punishment makes scapegoats the main targets, making it difficult to fundamentally solve the problem. In recent years, a series of major cases have shown a seemingly uncontrollable situation of "the more you block, the more it leaks" and "the more you strike, the bigger it gets."

The Absence of Legal Alternative Paths

Unfortunately, in the field of stablecoins, China has missed the opportunity to take the lead. Once, China was a major player in the global stablecoin market, with many of the founders of well-known exchanges being Chinese. However, continuous policy barriers have led many project teams to go abroad, leaving mostly grassroots practitioners in the domestic market.

Since 2016, the central bank has been promoting the research and development of the digital renminbi, attempting to benchmark against the US dollar stablecoin, aiming to reduce dependence on the US dollar and curb capital outflows. However, due to a lack of widespread application scenarios and ecological support, market acceptance remains sluggish. Relying solely on administrative orders for promotion is unlikely to be effective.

On the other hand, former director of the Digital Currency Research Institute, Yao Qian, has been reported for serious disciplinary violations and illegal activities, suspected of using virtual currency for power and money transactions, which highlights another aspect of regulation: policy resistance has not eliminated the problem, but rather made the gray paths more concealed.

Advantages and Use Cases of Stablecoins

A stablecoin is a programmable digital asset that is anchored to the value of fiat currency and operates on a blockchain network. Its core mechanism is to map the book value of fiat currency to on-chain tokens, featuring characteristics such as efficiency, decentralization, and low cost.

Main application scenarios include:

• Cross-border trade settlement: Achieve second-level payments, reduce fees and clearing cycles.
• Free Trade Zone Payment System: One-click revenue sharing, covering scenarios such as warehousing, customs, logistics, etc.
• Supply Chain Finance: Discounting accounts receivable, automatically completing multi-level split payments.
• Carbon Trading and Digital Asset Market: Enhancing Liquidity
• B-end and C-end payment tools: cross-border salary distribution, study abroad fees, offshore wealth management, etc.

Stablecoins do indeed carry the risk of abuse, but they also have practical positive uses. The United States, Hong Kong, and other regions are actively exploring "compliance sandboxes." We need to deeply understand their value and think about how to utilize them in a controllable manner.

The absence of a system is a key issue

Stablecoins are not inherently tools of crime; the key lies in whether the system keeps pace in a timely manner. Simply suppressing them not only fails to hinder technological development but may also result in losing the global competitiveness that could have been harnessed.

From the perspective of criminal lawyers, the institutional vacuum brings substantial law enforcement dilemmas:

1. The grassroots case handling personnel have insufficient understanding of blockchain technology, which affects the handling of cases.

2. Regulatory strategies are fragmented, and law enforcement actions resemble "whack-a-mole". There is a lack of systematic compliance guidelines, making it difficult to establish a sustainable governance system.

Future financial governance should establish a system that achieves a dynamic balance between security and efficiency, rather than solely relying on suppression or closed-door policymaking.

The real solution lies in building a compliant ecosystem that can guide, replace, and regulate, allowing the virtual currency regulatory policies to play a precise and effective role. Those that should be cracked down on should have nowhere to hide, while those that should be utilized should be put to our use.