The Dollar's Digital Dilemma: How U.S. Stablecoin Restrictions Could Cede Global Monetary Ground to China

The global financial landscape is undergoing a seismic shift as the United States and China vie for dominance in the digital currency arena. While the U.S. has prioritized regulating stablecoins to reinforce the dollar's hegemony, its fragmented approach risks creating vulnerabilities that China's centralized digital yuan (e-CNY) strategy could exploit. This divergence in governance models-U.S. private-sector-driven innovation versus China's state-centric control-has profound implications for the future of global monetary systems, particularly in the Global South.

The U.S. Stablecoin Framework: Strengths and Structural Weaknesses

The U.S. enacted the GENIUS Act in July 2025, establishing a federal regulatory framework for payment stablecoins, requiring them to be backed by high-quality reserves like cash and treasuries. On the surface, this legislation aims to enhance financial stability and transparency, aligning stablecoins with traditional banking standards. However, the Act's design contains critical flaws. By allowing state-level regulatory variations, it risks creating a "race to the bottom" in oversight, where laxer jurisdictions could become safe havens for illicit finance.

Moreover, the GENIUS Act fails to address risks posed by foreign payment stablecoin issuers (FPSIs), leaving the U.S. financial system exposed to adversarial influence or sanctions evasion. This oversight is particularly concerning given China's aggressive expansion of the e-CNY, which is now being tested in cross-border settlements through initiatives like Project mBridge. By 2025, e-CNY transactions via mBridge had surged to $55.49 billion, positioning it as a direct competitor to U.S. dollar-backed stablecoins.

The U.S. also rejected central bank digital currencies (CBDCs), opting instead to champion private-sector-led stablecoins as tools to extend the dollar's reach. This decision contrasts sharply with China's embrace of the e-CNY, which combines state control with technological innovation. While the U.S. seeks to leverage stablecoins for cross-border payments and remittances, its reluctance to adopt a CBDC leaves a regulatory gap that China is rapidly filling.

China's e-CNY: A Geopolitical Weapon of Multipolarity

China's digital yuan has evolved into a strategic asset. By late 2025, e-CNY transaction volumes exceeded $2.3 trillion, driven by domestic adoption and cross-border initiatives. The introduction of interest-bearing features-a first among major economies- has made the e-CNY more attractive to users, enabling the People's Bank of China (PBOC) to directly influence household savings and monetary policy. This innovation not only enhances user engagement but also positions the e-CNY as a viable alternative to dollar-backed stablecoins in markets where trust in the U.S. dollar is eroding.

China's geopolitical ambitions are evident in its cross-border strategy. Through mBridge, the e-CNY is being integrated into trade corridors in Southeast Asia, Africa, and Latin America, offering countries a non-dollar option for settlements. This aligns with broader efforts to internationalize the renminbi and challenge the dollar's dominance, particularly as nations in the Global South seek to diversify their currency exposure amid U.S. sanctions and inflationary pressures.

The U.S. response-relying on private-sector stablecoins- risks ceding ground to China's state-driven model. While the GENIUS Act aims to standardize stablecoin reserves, its lack of a CBDC counterpart means the U.S. cannot match China's ability to directly control digital currency flows or enforce compliance with its monetary policies.

The Global South: A Battleground for Financial Sovereignty

The Global South is becoming a critical arena in this digital currency race. U.S. dollar-backed stablecoins have gained traction in regions with weak banking infrastructure or high inflation. However, the same attributes that make stablecoins appealing-such as their dollar peg- also expose economies to currency substitution risks, where local currencies are increasingly displaced by foreign-backed digital assets.

China's e-CNY, by contrast, offers a non-dollar alternative that aligns with the interests of countries seeking to reduce dependency on Western financial systems. For instance, e-CNY pilot programs are being expanded to Southeast Asia, where China's economic influence is strong. This strategy not only promotes the e-CNY's adoption but also reinforces China's role as a counterweight to U.S. financial dominance.

The U.S. has recognized the strategic importance of this competition. The Working Group on Digital Asset Markets, elevated to the White House level, underscores the administration's intent to prioritize blockchain technologies and stablecoins as tools to reinforce the dollar's global role. Yet, the absence of a U.S. CBDC and the regulatory ambiguities in the GENIUS Act may hinder its ability to compete effectively with China's more cohesive approach.

Structural Risks and the Future of the Dollar

The U.S. stablecoin framework, while ambitious, contains inherent structural risks. By allowing regulatory competition between federal and state regimes, the GENIUS Act could fragment oversight and create loopholes for illicit actors. Additionally, the lack of a CBDC means the U.S. cannot directly compete with China's state-backed digital currency in cross-border settlements or monetary policy implementation.

China's e-CNY, meanwhile, is not without its own challenges. Its centralized nature raises concerns about data sovereignty and surveillance, which could deter adoption in privacy-conscious markets. However, its rapid growth and integration into global trade corridors suggest that these risks are being outweighed by its strategic advantages.

For investors, the key takeaway is clear: the U.S. and China are pursuing divergent paths in the digital currency race, with the former relying on private-sector innovation and the latter on state control. While the U.S. seeks to extend the dollar's dominance through stablecoins, its regulatory hesitancy and structural flaws may enable China to gain a foothold in critical markets. The Global South, caught between these two models, will play a decisive role in determining which system prevails.

As the 2025-2026 period unfolds, the battle for the future of global finance will hinge on which model-U.S. private-sector dynamism or Chinese state-centric control-can better address the structural risks of digital currencies while aligning with the geopolitical aspirations of nations worldwide.