Former People's Bank of China (PBoC) Governor Zhou Xiaochuan has issued a stark warning about the risks posed by stablecoins to China's financial stability and payment systems. Speaking at a Beijing policy meeting and later at the International Capital Market Association (ICMA) Annual Conference in Frankfurt, Zhou emphasized that even fully-reserved stablecoins can amplify systemic risk through leverage and trading channels.
Zhou highlighted several specific concerns: over-issuance, high leverage in collateralized financing, and the potential for redemption pressures that could be "multiples of the initial reserves." He criticized inadequate reserve custody standards, citing Facebook's initial plans to self-custody Libra assets as flawed, and argued reserves should be held by central banks or recognized custodians under central bank supervision.
The warning references historical precedents, particularly the May 2022 collapse of TerraUSD (UST), which saw stablecoin market capitalization fall by $25.63 billion in just 16 days. Zhou noted that arbitrage mechanisms designed to maintain pegs can accelerate collapse during market stress, creating a "run risk paradox."
A new study cited in the warnings suggests stablecoins face a one-in-three chance of collapse over the next decade due to crisis-induced arbitrage failures, with annualized risk estimates ranging from 3.3% to 3.9% - higher than FDIC-insured deposits.
Zhou called current regulatory frameworks like Hong Kong's Stablecoin Ordinance and the U.S. GENIUS Act "far from sufficient" and urged regulators to develop more robust tools to track amplification channels and prevent misuse in speculative activities.