Passage of the Genius Act in the US stirred up a lot of excitement towards stablecoins. The IPO of Circle added fuel to the fire, making US dollar stablecoins a household word. Such recognition and regulation have helped the stablecoin market to double in terms of market capitalization to around $280 billion. Growth has not created a healthy situation; 99% of stable coins are USD backed.

Put simply, there is too much concentration in US dollar stablecoin. It is an oversized risk for crypto and investment overall.

Defenders brush off the concerns of 99% market capitalization by saying the US dollar is the world’s reserve currency, all either want to or need to hold it. But the reality is that US dollar is only 56% of global reserves.

99% stablecoin versus 56% global reserves? Something is wrong with this relationship; it’s out of balance. A stable coin number somewhere between 56% and 99% seems to make sense.

For the 99% to go down, a new stable coin must arise. What foreign currency stable coin can carry this load? What country could take US dollar stablecoin market share?

China is a contender. China has been preparing for the digital world. Digital payment platforms like Alipay and WeChat Pay have become two of the biggest payment companies in the world. In 2020 the Chinese government rolled out digital yuan in four Chinese cities. In 2021 they increased the number of cities to 28.

Recent announcements show preparation is ratcheting up. Until recently, Beijing was only committed to the development of a sovereign digital yuan. Now they are examining stablecoins backed by yuan, a yuan stablecoin with the exact same mechanics as USDC.

This is an astonishing about face for China. For years the currency has been subject to capital controls, and cryptocurrency trading and mining have been outlawed since 2023. This change of heart is serious.

As a first step, it looks like they are going to use Hong Kong, the hub for the offshore yuan. Hong Kong just launched its own regulatory regime, which opens this month for tokens and stable coins, with the requirement that all stable coins be backed by highly liquid assets held in reserve.

For a country that likes to control its currency, this is good news. Every yuan backed token will take offshore yuan out of circulation from the city’s pool, helping minimize currency weakness

Hong Kong Companies are wasting no time. Seazen Group, one of the few Chinese property developers that survived the property crisis, plans to issue tokenized private debt at the end of this year. They also want to tokenize shopping centers.

So, we have a market that is too concentrated (US stablecoin), which creates opportunity for a new entrant to take share. We have the second largest economy in the world that has a strong position in foreign trade, changing the regulations and embracing stablecoins. Powerful stuff.

Many investment careers have been stained by being overly pessimistic regarding the investment or financial outlook of China. Years ago, it was “it is a communist nation. It can never be a great economy or investment area”; China is now the world’s second largest economy. Later it was “the real estate crisis will finish China off”.; well, since the real estate crisis the market is up, and the crisis is not that big a deal anymore. Finally, “China will be hurt by US tariffs”; there may be some economic pain, but they are still standing

The conclusion is that over the long-term betting against China is not a good idea. Stablecoins are no different.

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