Zhou Xhou Xiaochuan, governor of the People’s Bank of China, has written extensive articles on Stablecoins and Digital Payment Systems, highlighting the limitations and potential risks of these assets.
Some of the key points highlighted in Zhou’s article include:
- Decentralization is not suitable for all financial services. Zhou pointed out that the concept of “all services need to be decentralized” is exaggerated and that account-based centralized management systems are still operating strongly.
- Technology is not a sufficient standard. The success of a payment system depends not only on technical benefits, but also on factors such as security and regulatory compliance.
- Market Manipulation and Investor Risk: Stabilcoin argued that price and market manipulation in the Stablecoin market has not yet been prevented. This increases the risk by attracting unqualified investors.
- Issues of insufficient demand: Zhou said that stubcoins with poor usage may not be able to be effectively distributed in the market, so even if a license is obtained, it cannot be issued.
- Benefits of existing payment systems: He reminded us that the current system, especially in individual payments, has already dropped to a very low level in terms of costs, and that the use of Stablecoins does not exempt regulatory costs such as KYC and AML.
Zhou said Stablecoin publishers tend to minimize costs and maximize publication. However, the lack of understanding of monetary policy and macroeconomic regulations of Stablecoin issuers poses them with the risk of uncontrolled issuance and high leverage.
Regulations such as the genius law in the US and the stablecoin law in Hong Kong are trying to solve these issues, but Zhou said that the current controls are inadequate and will focus on the next issue:
Preliminary control: It is an important question of where the reserves for issued stubcoins are and who holds them. There have been past cases where this responsibility has been overlooked.
Multiplier Effect: Problem post-mortem transactions (deposits, loans, and collateral transactions) also create a multiplier for the money supply to stabilize. This poses a great risk in the event of a liquidity crisis.
Zhou said the issue of price manipulation and transparency poses serious risks to the cryptocurrency exchanges where stablecoins are frequently used, and current regulations are insufficient to address this. He also said that the opportunity for fragmented trading through Stablecoins and RWA (real world assets) encourages young investors under the age of 18 to enter the market.
*This is not investment advice.
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