The Strategic Risks of U.S. Stablecoin Interest Restrictions and China's Digital Yuan Advantage

The global monetary system is undergoing a seismic shift as the U.S. and China vie for dominance in the digital finance era. While the U.S. has embraced a market-driven approach to stablecoins, its regulatory choices-particularly the 2025 GENIUS Act-risk ceding ground to China's state-backed digital yuan (e-CNY). This analysis unpacks the strategic risks of U.S. policy and the geopolitical advantages China is building through its crypto infrastructure investments.

The U.S. Stablecoin Dilemma: Regulation vs. Innovation

The GENIUS Act, passed in July 2025, mandates that stablecoins be fully backed by U.S. dollars and short-term Treasuries, subjecting issuers to stringent capital and liquidity requirements. While this framework aims to stabilize the banking system and preserve the dollar's role in global finance, it inadvertently creates a paradox: by restricting stablecoin interest rates, the U.S. may stifle innovation and open the door for foreign competitors.

For instance, the act's prohibition on interest-bearing stablecoins-designed to prevent regulatory arbitrage- has redirected $155 billion in stablecoin reserves into U.S. Treasuries by October 2025. While this boosts demand for Treasuries, it also makes stablecoins less attractive to users seeking yield, particularly in emerging markets. Meanwhile, the Federal Reserve has warned that stablecoin adoption could alter bank deposit structures, depending on reserve strategies and access to central bank facilities. This creates a feedback loop where U.S. monetary policy becomes more sensitive to stablecoin dynamics, potentially increasing yield curve volatility.

The U.S. also faces a strategic blind spot: its refusal to develop a Central Bank Digital Currency (CBDC). The 2025 Anti-CBDC Act explicitly bans the Federal Reserve from issuing a digital dollar, reflecting Republican skepticism of state surveillance and centralized control. However, this decision leaves a vacuum that China is rapidly filling.

China's Digital Yuan: A State-Driven Counter to Dollar Hegemony

China's e-CNY is emerging as a direct challenge to the U.S. dollar's dominance. By 2025, the digital yuan had already processed 3.48 billion transactions totaling ¥16.7 trillion ($2.38 trillion), surpassing the dollar in cross-border volume within China. The People's Bank of China (PBOC) has further accelerated its strategy by allowing commercial banks to pay interest on e-CNY holdings starting in 2026, a move that Coinbase's chief policy officer warns could give China a "strategic advantage" over U.S. stablecoins.

China's cross-border payment infrastructure is equally formidable. The e-CNY International Operation Center in Shanghai, launched in September 2025, oversees platforms for digital payments, blockchain services, and digital assets, reducing costs and expanding access for global trade. Meanwhile, the Cross-Border Interbank Payment System (CIPS) has grown to 1,683 participants by May 2025, a 10% year-over-year increase, as China pushes to reduce reliance on dollar-based systems like SWIFT.

Hong Kong, China's regulatory sandbox, has become a critical hub for digital asset innovation. The Hong Kong Monetary Authority (HKMA) introduced a stablecoin regulatory regime in August 2025, while the Securities and Futures Commission (SFC) launched the ASPIRe Roadmap to build a resilient virtual asset ecosystem. These efforts have attracted $188 million in private investment for e-CNY-related projects in early 2025, signaling strong confidence in China's digital currency strategy.

The Infrastructure Gap: U.S. vs. China

While the U.S. has allocated $59 million over 2025–2030 for blockchain development via the Deploying American Blockchains Act, China's investments are more aggressive and state-coordinated. The PBOC's 2026 action plan for the e-CNY includes expanding cross-border pilots with Singapore, Thailand, and the UAE, positioning the digital yuan as a multipolar alternative to the dollar.

In contrast, the U.S. relies on private-sector innovation, with stablecoins dominating cross-border payments. By September 2025, stablecoin supply had grown to $305 billion, with $5.7 trillion in cross-border transactions in 2024. However, the lack of a U.S. CBDC and restrictive interest policies may limit scalability. For example, Visa-issued crypto card spending surged 525% in 2025, but this growth is contingent on regulatory clarity and market demand.

Strategic Implications for Global Monetary Competitiveness

The U.S. and China are building parallel financial ecosystems: one rooted in private, dollar-backed stablecoins and the other in state-issued digital currencies. The U.S. approach prioritizes privacy and market freedom but risks losing ground to China's centralized, infrastructure-driven model.

For investors, the key risks lie in the U.S. regulatory framework's potential to stifle innovation and the dollar's vulnerability to China's multipolar vision. Meanwhile, China's e-CNY and CIPS are creating a self-reinforcing cycle of adoption, particularly in BRI nations and emerging markets.

Conclusion: A New Currency War

The 2025 GENIUS Act and China's e-CNY strategy are reshaping the global monetary landscape. While the U.S. seeks to preserve dollar dominance through stablecoins, its regulatory constraints may accelerate the rise of alternatives. China's state-backed digital yuan, bolstered by cross-border infrastructure and regulatory sandboxes, is positioning itself as a formidable challenger. For investors, the next decade will hinge on navigating these divergent paths-balancing the risks of U.S. policy inertia with the opportunities in China's digital yuan ecosystem.