The Global Stablecoin Arms Race: How U.S. Policy Constraints Could Hand China a Strategic Edge in Digital Finance

The global stablecoin landscape in 2025 is no longer a neutral arena for technological innovation. It has become a battleground for geopolitical influence, with the United States and China deploying divergent regulatory frameworks to shape the future of digital finance. While the U.S. prioritizes stability and dollar dominance through the GENIUS Act, China's state-led push for the digital yuan (e-CNY) and Hong Kong's flexible stablecoin licensing regime are creating a parallel ecosystem that challenges Western financial hegemony. For investors, understanding these dynamics is critical to navigating the risks and opportunities in a world where digital currencies are increasingly weaponized as tools of geopolitical strategy.

U.S. Policy: Stability at the Cost of Innovation

The U.S. approach to stablecoin regulation, embodied in the GENIUS Act, emphasizes strict oversight to preserve the dollar's global primacy. According to the World Economic Forum, the legislation mandates that stablecoins be 1:1 backed by high-quality liquid assets like U.S. Treasuries and prohibits yield-bearing activities, effectively aligning stablecoin issuers with traditional banking standards. While this framework aims to mitigate systemic risks and combat money laundering, it also imposes significant constraints on innovation. For instance, the ban on interest-bearing stablecoins-unlike China's planned e-CNY interest payments-limits their utility as a tool for cross-border payments and savings.

According to a report, the GENIUS Act's restrictions could stifle the growth of U.S. dollar stablecoins in emerging markets, where demand for low-cost, yield-generating assets is high. This creates a vacuum that China's digital yuan and Hong Kong's stablecoin regime are poised to fill. Meanwhile, the U.S. decision to delay a retail CBDC while focusing on wholesale projects like Project Agorá underscores a strategic hesitation to cede ground in the digital finance race.

China's Dual-Pronged Strategy: State Control and Market Flexibility

China's strategy combines centralized control over the e-CNY with a more open approach to private stablecoins in Hong Kong. The People's Bank of China (PBOC) has accelerated e-CNY adoption through cross-border pilots with Hong Kong and the UAE, positioning it as a "digital deposit currency" that will begin paying interest in 2026. This move directly counters the U.S. ban on stablecoin yields, offering a compelling alternative for users seeking both stability and returns.

Simultaneously, Hong Kong's Stablecoins Ordinance, enacted in August 2025, allows for the issuance of stablecoins pegged to any official currency, including offshore RMB. This flexibility aligns with China's Belt and Road Initiative, enabling lower-cost cross-border transactions for trade partners in Asia, Africa, and the Middle East. As the Atlantic Council's CBDC Tracker notes, China's mBridge project-connecting the digital yuan with Thailand, the UAE, and Saudi Arabia-has already processed over 7 trillion yuan in transactions, demonstrating the yuan's growing digital footprint.

Geopolitical Risks and Competitive Advantages

The U.S. and China are not merely regulating stablecoins; they are competing to define the architecture of the global financial system. The U.S. model, rooted in market-driven innovation and consumer protection, risks falling behind due to its rigid regulatory stance. Coinbase has warned that the GENIUS Act's prohibition on stablecoin interest payments could erode the dollar's competitiveness against the e-CNY, which offers both stability and yield.

Conversely, China's state-centric model leverages the e-CNY to assert monetary sovereignty while allowing private stablecoins to coexist in Hong Kong. This duality creates a hybrid ecosystem that balances control with market access. However, it also exposes China to risks of overreliance on centralized infrastructure and potential pushback from countries wary of its geopolitical ambitions.

For investors, the implications are stark. U.S. dollar stablecoins remain dominant in global commerce, but their growth is constrained by regulatory caution. Meanwhile, China's e-CNY and Hong Kong's stablecoin framework offer a viable alternative for markets seeking to reduce dollar dependency. The challenge lies in balancing exposure to these competing systems while mitigating geopolitical risks, such as U.S. sanctions or Chinese state intervention.

Conclusion: A Tipping Point in Digital Finance

The stablecoin arms race is accelerating, with the U.S. and China each betting on fundamentally different visions of the future. The U.S. prioritizes stability and dollar dominance through strict regulation, while China's hybrid model of state control and market flexibility is gaining traction in global trade corridors. For crypto asset allocators, the key is to hedge against regulatory uncertainty in the U.S. while capitalizing on China's expanding digital infrastructure.

As the Atlantic Council notes, the outcome of this competition will not merely determine the winners in the stablecoin market but reshape the broader geopolitical order. Investors who fail to account for these dynamics risk being blindsided by a financial system where digital currencies are no longer just assets-they are instruments of power.