Recently, the United States has announced strong support for the development of cryptocurrencies and crypto assets, and has announced that it will build a national Bitcoin strategic reserve. This policy initiative has greatly stimulated the discussion and imagination of digital currencies around the world. Digital currency is a new form of currency that exists in digital form, based on cryptographic technology and distributed ledger technology, with characteristics such as decentralization, traceability, and immutability, and can be used for transactions and value storage, including legal digital currencies and virtual digital currencies. Its rapid development not only provides a new form of currency and asset class, but may also have a significant impact on the restructuring of the international financial system.
Three types of digital currencies and their characteristics
Currently, there are three main types of digital currencies globally, including cryptocurrencies represented by Bitcoin, stablecoins represented by USDT and USDC, and central bank digital currencies (CBDCs) represented by the digital renminbi (e-CNY). These three types of digital currencies have their own unique features.
The value of cryptocurrencies is not determined by the sovereign credit of a country, nor by other currencies or financial assets to which the currency is pegged, but by a set of rigorous computer algorithms. For example, Bitcoin is determined by a set of computer algorithms and requires high-performance computers with strong computing power to "mine" it. The total amount of Bitcoin is fixed, set by the algorithm at 21 million. Currently, about 19.8 million Bitcoins are in circulation, meaning that only about 1 million Bitcoins are left to be "mined". The most important feature of Bitcoin is its decentralization, as its creation is not tied to the credit of any country. Combined with its fixed total supply, which is similar to gold, it can overcome the tendency of central banks to cause inflation, and is therefore considered to be able to hedge against country-specific currency risks. The biggest problem with Bitcoin is its huge price volatility. The price of a single Bitcoin has reached over $100,000, and has fallen to around $86,000 in early March 2025.
The value of stablecoins is determined by the other currencies or financial assets to which they are pegged. The most popular stablecoins in the market currently are USDT and USDC, which together account for about 90% of the global stablecoin market capitalization. As the name suggests, USDT and USDC are pegged to the US dollar at a 1:1 exchange rate, and are therefore also known as US dollar stablecoins. In addition, there are also stablecoins pegged to the euro, gold, cryptocurrencies, and a basket of commodities. To issue one unit of a stablecoin, a fixed amount of currency or financial asset must be held as collateral. Therefore, compared to the highly volatile cryptocurrencies, the price of stablecoins is much more stable.
Central bank digital currencies are digital currencies issued by the central bank of a specific country, with the sovereign credit of that country as the backing, and pegged to the country's ordinary currency at a 1:1 ratio. The biggest advantage of central bank digital currencies is that they are issued by the central bank of a country, and can be supported by the central bank's lender of last resort function when their value experiences significant fluctuations, so the financial risk is very low. However, the reputation of central bank digital currencies is affected by the ordinary currency of the country. If the exchange rate of the country's ordinary currency fluctuates greatly or its purchasing power depreciates rapidly, the attractiveness of the central bank's digital currency will naturally be weaker.
The impact of Bitcoin on the international financial system
Although Bitcoin is a type of digital currency, due to the following two characteristics, it cannot truly fulfill the function of currency. On the one hand, the price of Bitcoin fluctuates greatly, which means that Bitcoin is difficult to serve as a pricing benchmark for other commodities and as a medium of exchange between other commodities; on the other hand, due to the limited total amount of Bitcoin, it is difficult for Bitcoin to serve as a currency to regulate the operation of the economy. Under normal circumstances, as the total economic volume increases, the central bank of a country will continuously issue new currency to meet the relevant demand, and the total currency of a country is usually constantly growing.
Therefore, the nature of Bitcoin is not a true currency, but a rather peculiar financial asset that has investment value in itself. There is considerable controversy in the market as to whether Bitcoin is a risky asset or a safe-haven asset. Based on the huge price fluctuations of Bitcoin itself, it is more like a risky asset. But given that the price trend of Bitcoin is largely inversely correlated with the exchange rate of the US dollar, it also appears to be a safe-haven asset that can hedge against exchange rate fluctuations of the US dollar.
The impact of stablecoins on the international financial system
Among the three types of digital currencies, it is actually the stablecoins that may have a major impact on the international financial system. As mentioned earlier, due to the fact that stablecoins are pegged to sovereign currencies, they indirectly possess the characteristics of sovereign currencies. US dollar stablecoins in particular have the relevant characteristics of the US dollar, with relatively stable exchange rates, and are therefore more easily accepted by various investors.
In recent years, the global stablecoin market capitalization has developed rapidly, reaching nearly $180 billion by the end of 2024. Currently, stablecoins are "conquering" in the following areas: First, US dollar stablecoins have begun to become the trading medium in the cryptocurrency market. In other words, when trading between cryptocurrencies such as Bitcoin and Ethereum and other currencies, trading parties are increasingly inclined to use US dollar stablecoins for payment. This means that in the virtual world, US dollar stablecoins have begun to play the role of the US dollar. Second, in the decentralized finance (DeFi) system, some institutions have already started to use US dollar stablecoins to provide liquidity support. For example, when relevant entities need to borrow, they can directly apply for US dollar stablecoin loans from specific institutions. Third, in some developing countries where the purchasing power and exchange rate of the domestic currency fluctuate greatly, residents and enterprises have already started to use US dollar stablecoins as a reliable international currency to store wealth, and US dollar stablecoins have to some extent even begun to replace the domestic currency.
US dollar stablecoins have strengthened the connection between the traditional currency circulation domain and the virtual world currency circulation domain, and have also filled the gap in the demand for US dollars by households and enterprises in some developing countries. Therefore, this digital currency is likely to strengthen the international monetary status of the US dollar in the international financial system. Once US dollar stablecoins more closely link the international credit of the US dollar with the application scenarios in the virtual world, they may greatly consolidate the hegemony of the US dollar.
The impact of central bank digital currencies on the international financial system
Central bank digital currencies are essentially sovereign currencies in the virtual world, and the reputation and risk of such currencies are stronger and lower, but ultimately depend on the competitiveness of the real currency of that country. Of course, the extent to which such central bank digital currencies can be used is also an important issue. For example, the renminbi is recognized globally as a sovereign credit currency with stable value. However, to date, the digital renminbi can only be used in retail scenarios, i.e. transactions between individuals and enterprises, and the digital renminbi can currently only replace cash (M0). Due to this limitation, transactions between enterprises, between enterprises and financial institutions, and between financial institutions are not yet applicable to the digital renminbi. This means that the main constraint on the development of the digital renminbi at the current stage is the limitation of the use cases. The reason why the People's Bank of China only allows the digital renminbi to replace cash (M0) in the initial trial of the digital renminbi is that this is a scheme with the least impact on the current commercial banking system.
Coping Strategies
At present, there are three development directions of digital currencies globally: cryptocurrencies, stablecoins, and central bank digital currencies, each with its own advantages, disadvantages, development prospects, and application directions. It is best not to bet on just one side, but to take a three-pronged approach and bet on them all at the same time, in order to maximize the dividends of the development of digital currencies or digital assets. On the one hand, the replacement range of the digital RMB should be expanded from M0 (cash) to M1 (cash plus demand deposits) and even M2 (cash plus all deposits) as soon as possible. Only by upgrading the replacement range of the digital RMB from M0 to M1 or even M2 can the application scenarios of the digital RMB be fully expanded, promoting the domestic and international use of the digital RMB and supporting the internationalization of the RMB. On the other hand, the construction of stablecoins in China should be promoted. Expand the use of digital tokens on Internet platforms, better combining the sovereign credit of the RMB with the global application scenarios of Chinese platforms. As long as the design and risk control are appropriate, the expansion of the use of digital tokens on these platforms can significantly expand the international monetary status of the RMB, and thus more confidently cope with the challenge of the US dollar stablecoin. In addition, at the level of the International Monetary Fund (IMF), the use and promotion of the digital Special Drawing Right (e-SDR) can be encouraged. The Special Drawing Right (SDR) is a supranational currency created by the IMF, pegged to a basket of currencies consisting of the US dollar, euro, RMB, yen, and pound, with current weights of 41.73%, 30.93%, 10.92%, 8.33%, and 8.09% respectively. SDR can currently only be used for transactions between the IMF and its member countries, as well as between member countries. The flourishing of various digital currencies is naturally better than the US dollar monopolizing the digital currency development track. e-SDR can expand the use of supranational reserve currencies in the digital domain and virtual space, and also help promote the diversification of the international monetary system.
