On the evening of July 1st, the School of Economics at Fudan University successfully held an online seminar titled "Stablecoins and the Great Changes in International Finance."
At the meeting, Professor Wang Yongqin, Executive Director of the Fudan Institute of Finance and a Yangtze River Scholar Distinguished Professor appointed by the Ministry of Education, stated that stablecoins cannot meet the three characteristics of money (singularity, elasticity, integrity), and their rapid development may exacerbate the shortage of U.S. Treasury bonds, thereby affecting global financial stability. He believed that the relative decline of the U.S. economic power and the rise of China and the enhancement of Asia's economic status will further highlight the challenges of the shortage of safe assets. China should quickly promote its government bonds to become a global safe asset to alleviate the global shortage of safe assets, further enhance the international status of the RMB, and promote the internationalization of the RMB.
Professor Wang Yongqin discussed the origin and development of stablecoins, pointing out that they emerged from attempts to improve cryptocurrencies such as Bitcoin. There are several improvements, but the stablecoin currently being discussed is backed by sovereign currency, especially highly associated with short-term U.S. Treasury bonds, and even very similar to money market funds. However, the problem with stablecoins is that they cannot meet the three basic properties of money, namely singularity, elasticity, and integrity. That is, stablecoins cannot guarantee value without dispute, cannot create new liquidity according to economic needs, rely only on existing assets, and cannot ensure that they will not be used for illegal activities.
Professor Wang Yongqin also pointed out that the development of stablecoins faces an insurmountable internal contradiction: the shortage of global safe assets (especially U.S. Treasury bonds). The larger the scale of stablecoins, the higher the demand for U.S. Treasury bonds as collateral, which will further exacerbate the shortage and push up its price. This is similar to the failed logic of the "National Bank era" in American history and shadow banks before 2008. The fundamental reason is the scarcity of underlying safe collateral. This shortage also constitutes a modern version of the Triffin dilemma—the tension between the global demand for dollars (safe assets) and the U.S. ability to provide sufficient safe assets (Treasury bonds). With the relative decline of U.S. power and the strengthening of fiscal constraints, this contradiction will only worsen.
Based on the trend of the shortage of safe assets and the relative decline of U.S. power, Professor Wang Yongqin believes that China should quickly promote its government bonds to become a global safe asset to alleviate the global shortage of safe assets, further enhancing the international status of the RMB and promoting the internationalization of the RMB. Professor Wang Yongqin also believes that for China, the most critical issue in the future is government bonds. Whether it is about China's monetary policy or the internationalization of the RMB, developing government bonds will bring many benefits—this will become a safe, open, and most important form of RMB asset.
The following is the full text of Professor Wang Yongqin's speech:
First of all, I would like to thank all the guests. Many of them are good friends, such as Zeng Gang, whom I met during the 2008 U.S. financial crisis. Zou Chuanwei, whom I met during my time at Harvard. These are all long-time friends. My colleagues at the Yangtze River Scholars, Guang You, need not say more. I will talk about three issues. First, stablecoins are a very hot topic. This afternoon, I also had a conversation with Mr. Mu, who is responsible for the research on digital currencies at the central bank. Today, I will share three aspects of my thoughts.
First, where did stablecoins come from? Why have we reached this point?
We know that after the 2008 financial crisis, there was a wave of "decentralization" around the world.
It started with Satoshi Nakamoto's Bitcoin. We don't know whether Nakamoto is an individual or a group. We don't know who he is. Because of the various financial crises, people were very dissatisfied with the existing financial system, believing that the existing financial system caused various economic instabilities. So they sought a "decentralized" monetary system.
That was Bitcoin. Bitcoin has no specific anchor or collateral, no specific fundamentals, it is based on a consensus. The holding method is not elaborated here. But a currency based on this consensus has nothing. Because its price is very unstable. Like a roller coaster. Therefore, the attempt of Bitcoin as a currency was a failure.
A currency must meet the characteristics, no question asked. When you use one yuan, it is one yuan. In English, it's called "at par." No doubt. When you go to a coffee shop to buy coffee, one yuan is one yuan. $1 is $1. But if you take an asset and ask about its value, others will say what is its value today? Then it is not a currency.
Bitcoin not only fails to meet "no question asked," but now it has too many questions to ask. It has too many problems. Therefore, as a currency, it is a failure. But as an investment asset, it continues to strengthen with the growing dissatisfaction with the government and the establishment.
People in this world haven't given up yet, continuing to seek a currency that can be used to trade Bitcoin, as Brother Chuanwei just said, using another currency. Not a policy currency. Settling for something else, they came up with stablecoins.
There are two types of stablecoins: one is algorithm-based. The few that collapsed in 2022 were algorithm-based. That also failed. Because the logic of the algorithm is not elaborated here. The algorithm is a promise, a no-arbitrage mechanism. But it doesn't have actual collateral or an anchor. It is ultimately very unstable. After spring 2022, these stablecoins fell into what is known as the "collateral winter."
In the third stage, the stablecoins we are discussing today are backed by sovereign currency. U.S. dollar assets, especially short-term bonds. Why short-term bonds? Because as a stablecoin, it itself is short-term. The duration of money is zero. It does not need long-term assets as collateral because volatility is high, and long-term is too long. Short-term bonds, bills, are issued to create a promise. This is called a "stablecoin."
Stablecoins are 1:1, as Brother Chuanwei mentioned, linked to the secondary market, mainly U.S. short-term Treasury bonds, very similar to money market funds.
There is a fund in the U.S., called government funds, which are money market funds, similar to China's Yu'e Bao. But what do they mainly buy? U.S. Treasury bonds, U.S. dollar assets. People who want to invest in government money market funds buy government Treasury bonds. But even these government money market funds are not always safe.
During the financial crisis, the one-to-one linkage broke. Because everyone was worried and rushed to redeem, during the 2008 financial crisis, there was a broken peg (sound). The one-to-one redemption was not stable. This is not surprising.
What is the purpose of this kind of currency? It is to further buy various things, including Bitcoin and various Crypto assets. Also includes cross-border anonymous use of low-cost economies. Actually, mainly money laundering, anti-terrorist financing, and other illegal activities. It has space for various tax avoidance purposes. It has such uses.
Has this phenomenon occurred in history? Brother Chuanwei also mentioned it, it cannot create money. It just uses existing money and existing assets as collateral to issue something similar to a money market fund. This thing is actually another shadow bank.
You know, money must meet three properties.
The first is singleness. Singleness means that when you pay, no question is asked. Can stablecoins do this? No. When you make a payment, you worry about what the collateral behind it is like. Singleness cannot be achieved.
The second is elasticity. Can it be done? No. Because it does not create new liquidity. It is attached to existing liquidity.
The existing banking system, a two-tier system, solves the elasticity problem. Because the two-tier system can create liquidity according to the needs. Everyone knows that loans create deposits. Of course, in the end, it is related to the central bank and regulation. So when paying, singleness is resolved by the central bank's reserves. So these two, the existing financial system, is a wonderful combination, the central bank's reserves solve the singleness, and the two-tier system solves the elasticity problem.
With the continuous changes in economic development, when the economy is good, more liquidity is needed. 99% of the liquidity is created by commercial banks. Of course, with the backing of the central bank.
The third feature of money is integrity, meaning whether you can be honest. Integrity means you shouldn't do illegal things. This stablecoin also cannot do it. All three cannot be done.
Now, let's briefly explain the curve, the internal tension, and don't worry about it. Because stablecoins themselves have a major problem. This problem is the same as shadow banks. Its collateral is scarce.
Going back to a fundamental question, in this world, including the U.S., and the entire world, there is a lack of liquid assets, such as safe assets, such as Treasury bonds. The world also needs this, including China, India, etc., countries that have risen, and Europe, which is economically developed but financially underdeveloped, needs extra money to store and preserve value. Originally, it was U.S. Treasury bonds, but U.S. Treasury bonds are not enough, especially with the rise of China, for many years before 2008. Shadow banks rose. Shadow banks tried to use some assets as collateral to issue various NBS (safe assets) liquidity. They eventually found real estate, U.S. real estate. It was actually continuously leveraging, increasing leverage, causing real estate prices to rise constantly, and finally bursting.
Historically, the U.S. was similar. The stablecoin seems very complex and technically complicated, but the economic logic is very simple. The U.S. has experienced this historically.
From 1865 to around 1913, this period in the U.S. was called the "National Banking System." Any state could establish a bank, but the collateral was Treasury bonds. It was very similar to stablecoins. To issue money, you had to use Treasury bonds as collateral. At that time, there was no Federal Reserve, which was established in 1913.
After the end of the American Civil War in 1865, until 1913, this period was called the "National Banking Era," because of the National Banking Act around 1865. During this time, money could be issued. Anyone could establish a bank, but the collateral was Treasury bonds.
The problem arose, Treasury bonds were not enough, the supply of Treasury bonds was limited. So, in autumn, when the U.S. was an agricultural society, there was a "money shortage." It couldn't be created because liquidity was scarce. In winter, liquidity became excessive again. It wasn't solved until later, when the Federal Reserve appeared. Until now, this two-tier monetary system.
I want to explain what this means? Even from a domestic perspective, stablecoins also have inherent logical problems from a general equilibrium perspective. Because the development of stablecoins is based on existing collateral, the Treasury bonds. And Treasury bonds as a safe asset are inherently scarce.
Why are they scarce? Because safe assets are always scarce, only a few countries can produce them. Especially the U.S., because the U.S. has a high GDP, the world's financial safe assets. Originally, it was not enough. Later, there were shadow banks.
Stablecoins are another shadow bank, from a historical perspective, they affect financial stability. In 2022, we have already seen a wave, and now another wave of stablecoins is emerging.
Think about this logic, the more popular stablecoins are, the more expensive and scarce the underlying safe assets, the Treasury bonds, become.
After the financial crisis, since 2008, the international community has regulated, including Basel III and the U.S. Dodd-Frank Act, which has made U.S. Treasury bonds even scarcer. Financial institutions need to hold sufficient Treasury bonds when conducting business, such as banks, requiring highly liquid safe assets.
Originally, it was scarce. So balance sheet expansion is restricted, making many examples in domestic finance invalid. This is known to teachers at the Yangtze River Scholars, CIP is no longer valid. It was always valid before. CIP is risk-free arbitrage. Money on the table, you don't take it, because of the scarcity of safe assets, the balance sheets of commercial banks, investment banks, or various institutions are restricted by the scarcity of safe assets.
Therefore, the development of stablecoins makes this phenomenon more acute. The shortage becomes more prominent. U.S. Treasury bonds are even more scarce. Contradictory to the Milan Report.
The Milan Report says that U.S. Treasury bond prices are too high because everyone is in short supply. This problem cannot be serious. According to the Milan Report, this is hitting the U.S. manufacturing industry. High U.S. Treasury bond prices mean high dollar prices. So Treasury bonds are also the collateral for the dollar, due to time constraints, not elaborated. I think this is an internal contradiction.
Now, let me talk about the international financial system. The title I gave is "Stablecoins and the Dollar System." Now, let me talk about the international monetary system. The logic is similar. It can also be reviewed from this logic for the international financial system. Initially, it was the gold standard. Each country's money creation was based on the gold standard. Britain was established by Ricardo. Ricardo debated, Ricardo won, and Britain became the first country in the world to adopt the gold standard. Later, it was the U.S.
The gold standard, as the name suggests, its currency is gold. The same problem comes up, it cannot solve the elasticity problem. Because there is no elasticity, creating money. Keynes called it the "shackles of gold." After the Great Depression, it was abolished. After World War II, the Bretton Woods system was established. Only the dollar was tied to gold. Other countries' currencies were tied to the dollar. This relatively eased the shortage of dollars and gold. But it still couldn't solve the problem. Nixon later abolished it. Gold was again scarce.
Since 1973, the world entered the "post-Bretton Woods system." Each country used its own methods. Essentially, the dollar has taken on the role of the dominant international currency. The collateral for the dollar is U.S. Treasury bonds. Central bank balance sheets show that every U.S. Treasury bond creates every U.S. dollar. So Treasury bonds are the collateral for the dollar.
The problem arises again. The Triffin dilemma has not been resolved. The essence of the Triffin dilemma is that gold is scarce or the collateral is scarce. The modern version of the Triffin dilemma is that U.S. Treasury bonds are scarce and have not been resolved. The Milan Report states that U.S. Treasury bonds are scarce, leading to high dollar prices, which affects the real economy, hits the U.S. trade and manufacturing.
The internal contradiction is because U.S. Treasury bonds are scarce. If stablecoins develop, it will make U.S. Treasury bonds extremely scarce. In the short term, it will indeed cause the dollar to appreciate. Because it is connected. To hold U.S. Treasury bonds, you exchange them for dollars. In this sense, U.S. Treasury bonds are also the collateral for the dollar.
So this issue, I feel, from a short-term perspective, it helps a bit with the U.S. dollar's decline. Because after the Ukraine conflict in 2022, the U.S. dollar reserves worldwide have decreased somewhat, because people are worried about holding U.S. dollar assets, U.S. Treasury bonds, fearing they might be frozen by the U.S., like Russia.
But the popularity of stablecoins has reversed the decline of the dollar. However, this "tension" exists. The U.S. has a long story. The U.S. power has indeed declined. During World War II, the U.S. GDP accounted for a large proportion of the world. It limited the number of Treasury bonds it could issue. Because Treasury bonds eventually may be the U.S. taxes.
The logic of the financial system's nesting. Your power declines, your tax revenue declines, you can't issue too many Treasury bonds. Issuing too many will lead to default and inflation. This is an "iron law," you have to lock it in place. I think the popularity of the U.S. dollar stablecoins, although very hot, its internal logic cannot be resolved. From both domestic and international perspectives.
Because the fundamental reason is that it is constrained by the shortage of safe assets. And this shortage of safe assets is closely related to the decline of U.S. power and its relative decline. This century is clearly the "Asian Century," the rise of China, the rise of India, and 60-70% of the world's GDP is in Asia. Therefore, the shortage of U.S. safe assets will only become more severe.
Finally, talking about China. China's choices. Does China need to worry about this issue? First, on a large scale, it is unnecessary to worry. Because there is an internal logic that restricts the development of stablecoins based on U.S. assets. An inescapable paradox, unable to escape. It's like a kite tethered to the ground, it can't fly far. This is the shortage of safe assets. It is related to the decline of U.S. power.
Talking about China, there are two views on the future financial order. One view is proposed by Professor Charles P. Kindleberger. He believes that the world only has one dominant currency, which is relatively stable. His logic is basically the logic of public goods. A country providing public goods will also maintain order, which is the best. It can internalize externalities and maintain world stability.
He believes that during the Great Depression of 1929, the world lacked a core country. At that time, Britain had declined, and the U.S. had not yet taken responsibility. There was no international dominant currency, only gold, not a country's sovereignty. Therefore, Kindleberger believes it was a "lawless world," a leaderless world. After a leaderless world, the financial system was inherently unstable. His view is that there must be a stable, single dominant currency. Undoubtedly, this is the dollar after World War II, and it has been the main one to this day.
But another view, another different voice, is from Professor Barry Eichengreen at Berkeley. This person is a scholar with a lot of thoughts. Personally, I think he is one of the most thoughtful financial economists today. His observation is strong. He has a different view. He believes that "the world's currency system will inevitably move toward multipolarity."
The reason, he didn't elaborate much. According to the logic I just mentioned, it can be explained. Your shortage of safe assets, and your international strength has undergone significant changes. If China is not unexpected, calculating exchange rates and GDP, it may soon exceed the U.S. This is a high probability event. I think the relative decline of the U.S. GDP is inevitable.
According to this logic, I think Kindleberger's view so far may not be correct in the current world. Because many problems, including Trump himself complaining, is that he doesn't want to take on this responsibility. He feels it's too heavy to bear. Not too light to bear. Life is unbearable. He feels the burden is too great, he can't bear it.
Last time, Jun Yan Dong (音) came to Fudan for a lecture, gave a report at the School of International Finance. His view is similar, he said: If China becomes a provider of safe assets, China will also become a dominant currency, sharing some of the burden with the U.S. The U.S. and China fighting? It's unnecessary. China becomes a force for peace. This is the greatest force for stability and peace. The U.S. can't compete with China anymore. China has already replaced it. I think this line of thinking is quite interesting. The development of international finance, the internationalization of the RMB, may become a force for peace in the future.
Finally, summarize, how should China go? Personally, I feel the most critical link is the importance of government bonds. The internationalization of the RMB, regardless of what kind of currency internationalization. The dominant currency, the most important thing is what? It must have a safe asset as a carrier.
From this logic, China's monetary policy, including various things, including the internationalization of the RMB. With government bonds, there are many benefits. Especially an important point, is that others want to hold RMB assets, as an asset. And it needs to be open. Most importantly, this. With this, there will be people willing to issue RMB, enhancing the RMB's position. But I think this is the top priority. Many teachers at home have also put forward this view, I think government bonds are very important.
Recently, there was a study by Professor Arvind Krishnamurthy from Stanford, a very famous financial economist, and a Chinese scholar at Stanford, Xu Chenzi, who now went to Berkeley. Their article studies which countries have become dominant currencies in history? They believe it was three countries, successively the Dutch guilder, the British pound, and the U.S. dollar. These three countries had a characteristic, not necessarily the largest economy at the time. Its economy, the dominant currency, like the Netherlands, at that time, its GDP was not the largest in the world, but it was not comparable to Spain. At that time, Spain had the largest GDP. Industrial output and other aspects, Spain's GDP was the largest. Latin America had colonies, the Spanish Empire. But the Spanish currency did not become the dominant currency. Their research found an important reason: Spain did not issue government bonds. To become a dominant currency, you must have assets to hold it. This is very important.
The dollar became the dominant currency, traced back to Hamilton's founding in the 1780s. Hamilton said, issue government bonds every year, government bonds, which is Hamilton's foresight. China should currently vigorously develop government bonds. It can solve many domestic problems, even if local debt is converted into government bonds, it can solve the problem of local debt. This is an urgent matter.
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