U.S. Stablecoin Regulation and the Risk of Losing Global Digital Currency Dominance to China

The global digital currency race has entered a critical phase, with the United States and China emerging as two dominant forces shaping the future of finance. While the U.S. has pioneered a regulatory framework for stablecoins through the 2025 GENIUS Act, its simultaneous prohibition of a central bank digital currency (CBDC) and restrictive approach to yield-bearing stablecoins has created strategic policy gaps. Meanwhile, China's aggressive CBDC reforms and controlled digital finance ecosystem are positioning the digital yuan as a formidable competitor. For investors, this regulatory tug-of-war between Washington and Beijing signals both opportunities and risks in the tokenized asset and stablecoin markets.

The U.S. Stablecoin Framework: Innovation with Constraints

The GENIUS Act, enacted in 2025, represents a landmark effort to regulate stablecoins as a distinct asset class. By mandating one-to-one reserve backing, monthly audits, and anti-money laundering (AML) compliance, the law aims to bolster trust in dollar-backed stablecoins while fostering innovation. This framework has enabled U.S.-backed stablecoins to surge in value, expanding from $206 billion to over $300 billion in 2025, with institutions increasingly adopting them as a bridge between traditional and decentralized finance.

However, the U.S. approach is not without flaws. The country's outright ban on a CBDC- codified in the CBDC Anti-Surveillance State Act-has left a vacuum in the digital currency landscape, ceding ground to global competitors like China. Additionally, the GENIUS Act's prohibition on direct interest payments on stablecoins has sparked regulatory ambiguity. Platforms like Coinbase, which facilitate indirect yield-sharing arrangements with stablecoin issuers, now face legal scrutiny over whether such practices circumvent the law. This uncertainty risks stifling innovation in yield-bearing stablecoin products, which are critical for attracting institutional capital.

China's CBDC Strategy: State Control and Competitive Edge

China's digital yuan initiative, spearheaded by the People's Bank of China (PBOC), exemplifies a contrasting approach. By prioritizing centralized control, Beijing has positioned the e-CNY as a tool for monetary sovereignty and cross-border payments. In 2025, the PBOC announced plans to allow interest payments on digital yuan wallets starting January 1, 2026, a move that could enhance the CBDC's appeal as a competitive financial instrument. This contrasts sharply with the U.S. regulatory stance, where stablecoin interest is restricted to indirect mechanisms, potentially limiting their utility in global markets.

China's strategy extends beyond CBDCs. While it has banned privately issued stablecoins, it is exploring offshore yuan-backed stablecoins through Hong Kong, aiming to complement its cross-border payment infrastructure and advance the RMB's internationalization. This dual approach-suppressing decentralized alternatives while promoting state-sanctioned digital finance-reflects Beijing's broader goal of maintaining control over capital flows and challenging U.S. dollar hegemony.

Coinbase's Yield-Sharing Dilemma and Global Implications

Coinbase's 2025 yield-sharing initiatives highlight the tension between U.S. regulatory constraints and China's CBDC ambitions. The platform's US Bitcoin Yield Fund and indirect yield-sharing arrangements with stablecoin issuers like Circle have drawn attention for their potential to generate returns for investors. However, the GENIUS Act's ambiguity around indirect interest sharing has created legal risks. For instance, Circle's payments to Coinbase for custodial services-based on USDC reserves- could be interpreted as circumventing the law, raising concerns about regulatory enforcement.

Coinbase executives, including Chief Policy Officer Faryar Shirzad, have warned that such restrictions could weaken the U.S. dollar's global dominance. By prohibiting interest on stablecoins, the U.S. risks ceding competitive ground to China's digital yuan, which will soon offer direct yield incentives to users. This regulatory divergence is not merely a policy debate; it is a strategic contest with profound implications for the future of digital finance.

Investment Opportunities and Risks in a Divergent Landscape

The U.S.-China regulatory split creates a two-track global market for tokenized assets and stablecoins. In the U.S., the tokenized real-world assets (RWA) market is booming, with assets like U.S. Treasuries and gold reaching $8 billion and $3.5 billion in assets under management, respectively. Regulatory clarity from the SEC and political support for blockchain innovation suggest a favorable environment for growth. However, the absence of a U.S. CBDC and restrictive yield policies could limit scalability.

Conversely, China's strict prohibition on RWA tokenization-declared illegal in December 2025-has stifled private-sector innovation, leading to a 90% decline in mainland-linked RWA activity in Hong Kong. While the digital yuan's cross-border initiatives offer opportunities, investors must navigate high legal risks and limited flexibility.

For investors, the key lies in geographic arbitrage. U.S.-friendly jurisdictions like Singapore, the EU, and the UAE are emerging as hubs for tokenization, supported by regulatory clarity and infrastructure development. Meanwhile, China's controlled ecosystem may appeal to those seeking exposure to state-backed digital assets but at the cost of innovation and privacy.

Strategic Policy Gaps and the Path Forward

The U.S. faces a critical juncture. While the GENIUS Act has strengthened stablecoin oversight, the absence of a CBDC and restrictive yield policies create vulnerabilities. As China advances its digital yuan with interest-bearing features, the U.S. risks losing its edge in global digital finance. For investors, the challenge is to balance the opportunities in U.S.-led innovation with the risks of regulatory fragmentation and China's centralized alternatives.

In this evolving landscape, adaptability will be key. Investors must monitor regulatory shifts, particularly in yield-sharing models and CBDC developments, while diversifying across jurisdictions to mitigate geopolitical risks. The digital currency race is far from over, but the next few years will determine whether the U.S. can maintain its leadership-or cede it to Beijing.