U.S. Stablecoin Regulation and the Risk of Ceding Digital Dollar Dominance to China: A Geopolitical and Infrastructure Analysis

The global financial landscape is undergoing a seismic shift as the U.S. and China race to define the future of digital currency. With the U.S. adopting a private-sector-focused stablecoin framework and China advancing its state-backed digital yuan (e-CNY), the stakes extend far beyond regulatory debates-they represent a direct challenge to the dollar's centuries-old dominance in global finance. This analysis examines how divergent regulatory and technological strategies are reshaping the competitive dynamics between the two nations, with profound implications for tokenized asset ecosystems and geopolitical influence.

The U.S. Stablecoin Framework: Innovation or Overreach?

The U.S. has taken a bold step with the GENIUS Act, which became law in July 2025, establishing the first federal regulatory framework for stablecoins according to the act. This act mandates that dollar-backed stablecoins maintain 100% reserves in liquid, safe assets such as U.S. dollars, short-term Treasuries, or insured demand deposits as research shows. While this approach aims to preserve monetary discipline and align with the EU's MiCA standards, it also introduces a critical limitation: the prohibition of interest-bearing stablecoins as research shows.

This restriction has sparked fierce debate. Critics, including traditional banks and the Bank Policy Institute, argue that interest-bearing stablecoins could destabilize the financial system by siphoning deposits away from traditional institutions as research shows. However, crypto advocates counter that this ban stifles innovation and cedes ground to foreign competitors. According to Coinbase CEO Brian Armstrong, U.S. hesitation to allow stablecoin yields could enable China's digital yuan to dominate global financial flows.

The U.S. strategy also faces a paradox. While the GENIUS Act enforces strict reserve requirements, it simultaneously encourages market-driven expansion of stablecoin usage in cross-border payments and treasury operations according to analysis. This duality risks eroding the very discipline the act aims to enforce, as market incentives may lead to leverage and instability over time as research shows.

China's Digital Yuan: A State-Driven Counteroffensive

China's e-CNY is rapidly evolving into a formidable competitor. Starting January 1, 2026, commercial banks will be permitted to pay interest on digital yuan wallet balances, effectively reclassifying the e-CNY from a digital cash substitute to a digital deposit according to analysts. This move integrates the e-CNY into China's banking system, aligning it with conventional deposit mechanisms and offering a direct challenge to U.S. stablecoins according to analysts.

By November 2025, the e-CNY had already processed 3.48 billion transactions, with a cumulative value of 16.7 trillion yuan ($2.38 trillion), and dominated cross-border transactions through the mBridge platform according to financial reports. The People's Bank of China (PBOC) has also expanded the e-CNY's utility in tokenized asset ecosystems, including real estate and art, while maintaining a strict regulatory environment that suppresses decentralized cryptocurrencies according to financial reports.

China's dual strategy-promoting the e-CNY while restricting decentralized alternatives-positions it to dominate global financial infrastructure. The PBOC's recent warnings against fraudulent schemes exploiting the e-CNY's new features underscore its intent to control the narrative around digital finance according to industry sources. Meanwhile, the e-CNY's integration with cross-border initiatives like mBridge and its alignment with traditional banking systems enhance its utility in international trade according to analysts.

Tokenized Asset Ecosystems: A New Frontier of Competition

The U.S. and China are also competing in tokenized asset ecosystems, with divergent approaches. In the U.S., the GENIUS Act has enabled banks to issue stablecoins through subsidiaries, fostering institutional participation in tokenized securities and real estate according to financial analysis. Major banks like JPMorgan Chase and Bank of America are exploring cooperative token projects to maintain relevance in a digital-first financial ecosystem according to industry reports.

China, however, is leveraging the e-CNY to tokenize assets under state oversight. The PBOC's recent action plan emphasizes the e-CNY's role in cross-border transactions and its potential to replace private payment platforms like Alipay and WeChat Pay according to financial reports. While China has cracked down on real-world asset (RWA) tokenization by decentralized platforms according to financial reports, its state-backed e-CNY is being positioned as a secure, scalable alternative for tokenized art, securities, and real estate.

Geopolitical Implications: A Battle for Financial Supremacy

The U.S. and China's strategies reflect broader geopolitical objectives. The U.S. aims to preserve the dollar's dominance in global payments and sanctions enforcement while mitigating risks from private stablecoin growth according to research. China, meanwhile, is using the e-CNY to challenge the dollar's supremacy in international trade and payments, promoting the yuan through cross-border initiatives like mBridge according to financial analysis.

This competition is not merely economic-it is existential. The U.S. risks losing its ability to shape global financial standards if it fails to adapt to the rapid evolution of digital currencies. China's state-driven model, while authoritarian, offers a centralized alternative that could appeal to countries seeking to bypass U.S. sanctions or reduce dollar dependency according to financial reports.

Conclusion: A Call for Strategic Agility

The U.S. must balance regulatory caution with innovation to retain its financial leadership. While the GENIUS Act provides a foundation for stablecoin oversight, it must evolve to address emerging challenges like interest-bearing tokens and cross-border competition. Policymakers should consider relaxing restrictions on stablecoin yields to prevent ceding ground to China's e-CNY, while ensuring safeguards against systemic risks according to research.

For investors, the key takeaway is clear: the future of digital finance will be defined by the interplay of regulation, technology, and geopolitical strategy. Those who recognize the urgency of this competition-and act accordingly-will be best positioned to navigate the next era of global finance.