The FT reports this morning that:
Chinese tech giants have paused plans to issue stablecoins in Hong Kong, after Beijing raised concerns about the rise of currencies controlled by the private sector.
Companies including ... had said over the summer they would participate in Hong Kong's pilot stablecoin programme or issue virtual asset-backed products, such as tokenised bonds. But they have since put their stablecoin ambitions on hold after receiving instructions from Chinese regulators, including the People's Bank of China (PBoC) and Cyberspace Administration of China (CAC), not to move ahead, according to multiple people familiar with the situation.
The reason given is that Chinese authorities had "concerns about allowing tech groups and brokerages to issue any type of currency."
They are right to be concerned. There are a number of macroeconomic reasons why.
First, the creation of money must always be a matter of public trust. Stablecoins are, by definition, privately issued claims on supposedly safe assets. However, history has already shown that private institutions cannot be trusted to maintain parity between their tokens and the currency they claim to represent. The result has been instability and fraud, and that risk could grow so that systemic risk might arise if confidence breaks down, as I think it will.
Second, and vitally, money is not a private commodity. It is a public institution, representing a social contract guaranteed by the state. When private corporations create quasi-currencies, they are in effect privatising part of that social contract. They want to capture the benefits of issuing money without accepting any of the public responsibilities that accompany it.
Third, if major tech companies were to issue their own tokens for use in everyday transactions, they would be creating a parallel monetary system, one that sits outside democratic oversight and macroeconomic control. In practice, that means monetary policy could be undermined and fiscal sovereignty weakened. For a country as large and strategically managed as China, that is clearly unacceptable.
Fourth, the power such private currencies might confer would be extraordinary. Whoever controls the currency controls the data, the transactions, and the network effects that bind users to it. In the hands of private technology firms, that power could dwarf that of the state, creating an unelected financial oligarchy. It is hard to see how that could ever serve the public good.
Fifth, stablecoins are not, in any meaningful sense, stable. They rely on promises that the assets backing them are always available and liquid. Yet every recent crisis, from the 2008 crash to the collapse of FTX, has been centred on synthetic financial products where such promises of liquidity cannot be relied upon when markets turn. The supposed stability of a stablecoin can only be guaranteed to exist as long as no one asks to redeem it, making the implicit promise to pay meaningless, unlike that offered by a government.
So, when Chinese regulators tell their tech giants not to issue private currencies, they are acting on the principle that the creation of money must remain under public control. And while China's own system of control may not be democratic, the underlying economic logic is sound because letting corporations create money is a direct challenge to the monetary sovereignty of the state.
Western governments should take note of this occasion. The same dangers apply when stablecoins are proposed by major corporate players in Western markets who then seek to insert themselves between the public and the central bank. The state cannot regulate effectively what it no longer issues or guarantees. Once money becomes a private good, its accountability, stability, and public purpose are lost.
The conclusion is obvious. Money is a public utility. The right to create it must be reserved by the state and not leased out to those who would turn it into yet another platform for speculation and control. Stablecoins are not progress; they are a privatisation of trust. And trust, once broken, is very hard to restore.
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Whilst I am not trying to downplay China’s failings (human rights, autocracy etc.) they do get an awful lot right; if they see a problem ahead they will deal with it… and this is a classic example.
One could argue that this is motivated by a desire to keep CCP control on all aspects of life… and that is, no doubt, true – but it also happens to be right.
Stablecoins (or private money) have a long history and the Free Banking era in the US (1837 to 1866) is the classic example… and the parallels with today are obvious
Agreed. Their human rights record is dire and to be condemned, but that does not mean we cannot learn from then.
You are both right about China. Their human rights record is appalling, it is not a democracy and the growth in Chinese nationalism as it’s military grows is alarming. But OTOH, they take the climate emergency deadly seriously, will not , unlike too many Western countries, kowtow to Trump, and are absolutely correct in opposing the crypto nonsense. This week, we saw Trump’s America wreck 10 years hard work in trying to get global shipping emissions down sabotaging, at the last minute, the conference to approve it using the usual bully boy tactics, all because their moron of a president ‘thinks’ global warming is a scam.
The USA has gone as any kind of global leader on anything. It has as far as I can see, one of two futures. Tyranny or civil war.
The Chinese are smart they study and learn from the West what works and what doesn’t. There’s even a book to confirm this by Julian Gewirtz “Unlikely Partners: Chinese Reformers, Western Economists, and the Making of Global China.”
Brring Brring, Brrring Brring: “Hello People’s Bank of China (PBoC) – how can I help”
Xi: “this is Xi, the politburo has decided to stop the issue of stable coins by all banks – tell our appointees on each bank’s main board”.
PBoC: “yes comrade Xi”.
Click.
How it works in China.
It will be interesting to see how US tech bro rhetoric risese against China – given the country in terms of trade (& thus money) plays a pivotal role. Doubtless Trump will raise tariffs, again, hmm going to be a very expensive Xmas in UST(rump).
The primary benefit of a private currency, such as a stable coin, is seigniorage, the ability to create money. The issuer gains this benefit, the users do not. Stable coins supposedly eschew seigniorage by backing their coins by a real asset. If they really eschew seigniorage then there would be no point in stable coins – so they wouldn’t be issuing them.
Private currencies, such as stable coins, have no legal function. Their only purposes are illegal and, with stable coins, to scam people and take their money. Issuers may say they are fully backed, but simply by issuing such coins that is clearly false.
Human beings are slow to learn. The mortage bond securities crash of 2007/2008 was down to the insurance companies supposedly backing these securities actually not having the wherewithal to back them when push came to shove! Major lesson not learnt by the crypto enthusiasts! In particular the securitisation of private sector loans was an attempt to emulate the treasury bond market but nobody bothered to figure out that the reason these bonds were so popular (information insensitive in financial parlance) was a government’s ability to A) create money from nothing and B) eliminate it and all at their discretion.
Yes, you are correct…. but it is not only about crimes and scams. Historically, private money has been issued as a result of either a shortage of government currency or barriers to using it. Or, another way – the convenience of using private money outweighs the risks of holding it.
I would suggest there are many holders of stablecoins that find them convenient to use and accept (foolishly, in my view) the risks. Crime? Yes. Crypto speculation? Yes… but also failures of the banking system.
Seigniorage is the reason for issuers to create private currency/stable coins but “loss of interest” for users of stable coins is trivial because banks pay no (or low) interest on deposits.
For users it is cheap money transfer. In the UK we have BACS that is free for most of is but I get charged £20 for larger payments and if they are cross currency the FX rates are appalling. In the US it is worse.
So, although the major story is crime/speculation/scams we should still see this underlying message.
The solution?
1) We have an “Energy Cap” (the max price foe energy) why not an “interest rate floor”.. at Base Rate minus 1% (say)? (This also has the side benefit of stopping the banks trousering all the money paid as interest on Reserves by the BoE. Sure, the government is still paying but at least it doesn’t go to the banks and could be recouped through tax)
2) In Tufton Street “competition” should reduce money transmission costs…. but in the real world it does not. So, create a competitor. BBB – the Basic British Bank – that offers basic banking accounts and services at fair prices. Then other banks will have to compete.
Now, those might be video ideas…
Thank you
It ought to be obvious to human beings that the market always has an adversative aspect to it, namely greed. It ought to also be obvious that using money and money instruments are a means to make markets more effective but these too will be targeted for the purpose of avarice. Yet few actually recognise these issues instead they dream like children of winning the lottery to put right the unhappiness misused markets create in their lives. Failing winning the lottery they resort to using the democracy machine and an ill-informed vote for a political party that offers jam tomorrow, taxes slashed to the bone, etc. It’s a daunting task getting grown-up juveniles to actually grow up mentally!
You would have enjoyed discussions we had on money when walking this morning.
‘Totally agree about China’s attitude to bitcoin and human rights.
I would be surprised if China risked war by being militarily aggressive, but I was also surprised when we went into Iraq and Afghanistan to such an extent on such a flimsy basis (thinking about Taiwan). I think U.S. aggression in Iraq and Afghanistan re-wrote the rules in the world order and helped justify this sort of behaviour (and Putin has used this as a flag of convenience too in my opinion).
I honestly think that the Chinese want us to leave them alone. But the message from the Chinese – hemmed in in the South China sea – is that if you come for us, we are here and you’ll pay for it dearly. And why not?
Would that our mandarins were as smart on the issue of crypto and stable coins.
Is there a way we can learn from this Stablecoin craze and turn it on its head? Anyone for Digital Tally Sticks?
I guess its simple. If you are the leader of the Chinese Communist party your very existence depends on state power and your ability to keep your hands on its levers. You don’t give any of that power away to voters and you don’t let any of it go to buyers, owners, creators of crypto currencies. How will you keep control of the economy and stay in power if you do?
If you are an American tech bro or billionaire like Trump, state power is the problem.
It takes the “hard earned ” wealth of the rich away and spends it on services for the undeserving little people. Crypto allows you to hide your money from the thieving, incompetent hands of the state and keep all your riches to yourself as you should be able to.
Obviously I don’t find either of these philosophical approaches in any way appealing. On balance I think the Chinese treatment of crypto is the better option, even if it serves to keep an illiberal authoritarian regime in power.
Was the financial collapse in Germany in the 1920s not largely the result of private banks being allowed to print their own money?
Would privately issued digital coins not lead in the same direction – or am I missing something?
You are right
Anyone can create money as all money is just debt/an IOU (way back when before credit cards, some department stores issued their own tokens in exchange for the state currency that could only be used in their stores). However, it is the unit of account that becomes the measure of acceptance or otherwise of that debt and it is the state that monopoly controls its own unit of account not private capital unless the state defers an aspect of that power by licence to such as private banks.
What makes something like Trump 2.0 so scary is the advancing power and control it is exercising over the flow of the monopoly currency of the USA. The Trump family enrichment in issuing tokens and receiving US$ in exchange without any enforceable promise to swap back to US$ at a guaranteed rate is but one of their grifts. China well understands the problem.
When it comes to human rights, I suspect that China is no worse (how could it be possible?) than the USA and its enabling of genocide and extrajudicial murder. None of which is to condone any such obscene behaviour.
If you’ll allow me, here’s a bit more about digital tally sticks. The critical point is that tally sticks didn’t pay interest. I think maybe that could shake things up a bit.
That one feature meant they circulated as a means of exchange, not as a way to accumulate wealth. No one got richer by sitting on them. They worked because people trusted they would be accepted for tax, and that was enough.
Imagine a modern digital version of that: interest-free, state-issued, redeemable against tax. It would behave very differently from gilts or bank deposits:
It couldn’t be hoarded as a rentier asset to passively generate income.
There’d be no flow of public money into private hands via interest payments.
It would circulate to support real economic activity rather than feed speculative accumulation.
It would redefine so-called government “debt” as simply unredeemed tax credits, not a burden that balloons through compound interest.
In other words, a digital tally system wouldn’t just compete with stablecoins, it could seriously undercut the rentier model that relies on the state issuing interest-bearing liabilities to guarantee private returns.
It’s basically public money without the private yield and that is why I think it might be worth exploring. Or do I need to cut back a bit on the espressos?
The equivalent is undeposited cash.