China Launches Yuan-Backed Stablecoin to Challenge Dollar Dominance

China is preparing to introduce yuan-backed stablecoins, a significant policy shift that signals its intent to challenge the dominance of U.S. dollar-backed stablecoins in the global financial system. The plan, set to be reviewed by the State Council this month, represents one of the most transformative financial policy changes in recent years in the country [1]. This development comes after years of stringent regulation on cryptocurrencies, including a 2021 ban on trading and mining digital assets.

The move aims to boost the international usage of the yuan and reduce reliance on the dollar, especially in cross-border transactions. At present, U.S. dollar-backed stablecoins such as USDT and USDC account for over 99% of the global stablecoin supply [1]. The proposed yuan-backed stablecoins are expected to play a crucial role in China's broader strategy to increase the yuan’s presence in global trade and finance.

The timing of the announcement aligns with the upcoming Shanghai Cooperation Organisation (SCO) summit in Tianjin, where China is likely to advocate for greater adoption of the yuan in international trade, including in digital form. The yuan’s global payment share has dropped to 2.88% in recent months, its lowest in two years, highlighting the urgency for action [1]. In contrast, the U.S. dollar maintains a dominant position in global transactions, accounting for nearly 47.2% of international payments, according to SWIFT data.

The initial rollout of the yuan stablecoin will be fast-tracked in China Hong Kong and Shanghai, both of which have already been involved in digital yuan pilot projects. China Hong Kong’s Stablecoin Issuers Licensing Regime, which took effect on August 1, gives the region a head start in regulating and hosting fiat-backed stablecoin operations [1]. Meanwhile, Shanghai is developing a digital yuan international operation center that may eventually expand to include stablecoin-related infrastructure.

The government’s strategy hinges on leveraging stablecoins as a tool to enhance yuan usage in international commerce, particularly in Asia and among countries participating in China’s Belt and Road Initiative. The programmable and borderless nature of stablecoins is seen as a strategic advantage in this effort [1].

However, the initiative faces several challenges. China’s strict capital controls could hinder the global adoption of yuan-backed stablecoins, as they limit free cross-border movements of funds. Additionally, the digital yuan (e-CNY) has yet to gain significant traction in the market, with Alipay and WeChat Pay dominating domestic digital payments. Similar challenges could emerge for the new stablecoins unless they are integrated into broader trade and payment ecosystems.

Other countries are also exploring their own fiat-backed stablecoin initiatives. In Asia, South Korea and Japan are evaluating won- and yen-backed digital coins, respectively [1]. Meanwhile, the U.S. continues to support dollar-backed stablecoins. Former U.S. Treasury official Scott Bessent has argued that stablecoins could reinforce the dollar’s global leadership, and legislation such as the GENIUS Act seeks to create a regulatory framework for U.S. bank-issued stablecoins.

As China moves forward with its yuan-backed stablecoin plan, it aims to reshape the global stablecoin landscape and position the yuan as a credible alternative to the dollar. The success of the initiative will depend on overcoming regulatory and adoption hurdles while navigating a competitive and rapidly evolving digital currency environment.

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[1] China Set to Shake Crypto Markets with First-Ever Yuan Stablecoin Plan Amid Dollar Dominance (https://www.cryptoninjas.net/news/china-set-to-shake-crypto-markets-with-first-ever-yuan-stablecoin-plan-amid-dollar-dominance/)