Original title: "Dialogue with Dr. Xiao Feng (Part 1): The Legislation of Dollar Stablecoins is a Victory for Technological Innovation, but the Impact Will Be Very Complex"

Original author: Meng Yan

Introduction:

With the passage of the US dollar stablecoin bill by the U.S. Senate and the passage of the Hong Kong dollar stablecoin bill by the Hong Kong Legislative Council, stablecoins have quickly become the hottest industry topic and have attracted wider attention. It is widely expected that with the implementation of the US dollar stablecoin bill, the blockchain digital economy will usher in a very exciting explosion, and there will be a new entrepreneurial window around this US dollar stablecoin and real-world assets (RWA). Dr. Xiao Feng is a Chinese leader in blockchain research and practice, with a deep understanding of blockchain, stablecoins, and RWA. In order to fully understand the opportunities of this era, I had the honor to have an in-depth exchange with Dr. Xiao Feng through video conference and text, which I compiled and published for discussion with my peers. Due to the large length of the original article, it was published in two parts. The first half focuses on the significance of USD stablecoins, while the second half focuses on the stablecoin economy and the opportunities that RWA brings to Chinese entrepreneurs. The views in the article are only the words of one family, and readers are welcome to communicate.

1. The Motivation for Stablecoin Legislation Transparency

Meng Yan: Dr. Xiao, your recent speeches have caused a great stir in the entire Chinese blockchain community, especially the speech "Back to the Origin" aimed at blockchain entrepreneurs, which has had a significant impact. In this speech, you not only reiterated the value logic of blockchain but also clearly pointed out that the industry is facing a new explosion cycle, and entrepreneurs need to return to their original intentions and set off again, ensuring they are on the right path. This is my understanding of your speech.

The timing of your speech is indeed very accurate. THE U.S. SENATE PASSED A VOTE ON THE GENIUS STABLECOIN BILL ON MAY 19, FOLLOWED BY THE HONG KONG LEGISLATURE PASSING THE STABLECOIN BILL ON MAY 21. A legislative race over stablecoins has quietly begun. At present, a new consensus is being formed, that is, the blockchain field is about to usher in a golden window period of entrepreneurship and innovation, and its energy intensity may exceed that of AI for a period of time. Many outsiders who have never been involved in blockchain and Web3 may have been dismissive of this last month, and now they have adjusted their minds and started to pay attention to the opportunities in this space.

This situation is hard-won. I have been in this industry for ten years, and I have mixed feelings about it. Over the past years, major countries around the world have taken a very cautious, even negative attitude towards blockchain, crypto assets, tokens, DeFi, and the entire set of new technologies associated with Web3, with tight regulations, while mainstream media has almost uniformly stigmatized them. In my impression, there has not been another example of treating an emerging technology this way in over two hundred years since the Industrial Revolution. But mountains cannot hide the sun; after all, the river flows eastward, and this day has finally come.

However, the Trump administration in the U.S. has made such a significant turn that the public still needs an explanation. I have seen some self-media interpreting this matter from a conspiracy theory perspective, such as viewing it as a money-making tool for the Trump family to line their pockets, or as a monetary war launched in conjunction with the trade war. So what do you think is the motivation behind the U.S. promoting stablecoin legislation?

Xiao Feng: The U.S. presidential team and Congress have been relatively frank and transparent on the issue of the motivation for stablecoin legislation, and they have openly said that the first is to modernize the U.S. payment and financial system, and the second is to consolidate and strengthen the position of the U.S. dollar, creating trillions of dollars in demand for U.S. Treasury bonds in a few years. I think that's the answer, there aren't so many conspiracy theories here. Not long ago, I had a conversation with a crypto policy advisor to the President of the United States, and he told me very bluntly that the Bitcoin National Reserve is the second place for the United States, and the dollar stablecoin is the first and the core interest of the United States. AS I UNDERSTAND IT, THE GOAL OF PRESIDENT TRUMP'S TEAM IS TO ENSURE THAT THE GENIUS BILL IS PASSED BEFORE THE U.S. CONGRESSIONAL HOLIDAY IN AUGUST, AND IT LOOKS LIKELY TO BE SOONER NOW. Under these circumstances, the Hong Kong legislature has shown flexibility and efficiency, and the passage of the stablecoin ordinance in the third reading is commendable.

Meng Yan: Some people are now comparing this bill to the Bretton Woods Conference in 1944 and the Nixon Shock in 1971, claiming that it is constructing a "Bretton System for the Digital Economy Era." The basic logic of this statement is that the United States, in the process of de-globalization, is very concerned about the weakening of the dollar's status. Therefore, it uses digital currency as a "nuclear weapon" to deliver a dimensional shock to the existing international monetary financial system, hedging against the impact on the dollar and consolidating dollar hegemony. What do you think about this viewpoint?

Xiao Feng: I just mentioned that one of the important purposes of the United States openly acknowledging the promotion of stablecoin legislation is to consolidate and enhance the status of the dollar. From the Senate vote, this is a bipartisan consensus, and they also know they are making history. The United States has come to this understanding through a process and has paid some costs for it. The previous U.S. government, especially experts like former SEC Chairman Gensler, understood blockchain, but why did it still become entangled for so many years? It is merely a reluctance to let go of the existing payment network, including SWIFT, as well as the financial governance, regulation, and anti-money laundering mechanisms built on this network.

However, the progress of blockchain technology itself in the past few years, especially the practice of financial sanctions against Russia after the Russian-Ukrainian war, shows that the technical advantages of blockchain are conclusive and irrefutable, so there is no doubt that the entire financial infrastructure is moving towards the blockchain, just like the steam engine to the era of electrification, and there is no force that can stop it. There is no point in burying your head in the sand anymore, the situation is stronger than people.

Compared with the previous administration, the Trump administration has embodied a more realistic attitude in all aspects, at worst it is not principled, and at best it is proactive. So the attitude of the United States now is that if it is inevitable to bypass SWIFT for payment settlements, then at least don't let it bypass the dollar; If USD tokenization is unavoidable, then at least ensure that every USD token is created based on US assets. Since it can't be blocked, it is a core national interest of the United States to ensure that in the digital economy, in the Web3 world, and in the AI era, the US dollar will still become the main payment and settlement tool. From the perspective of the United States, this is a conspiracy, a clear card.

Will the US dollar stablecoin be able to create a new "Bretton system"? Observation is required. Over the past few years, the dollar's global position has declined, and there is no doubt that the United States wants to strengthen its position through stablecoins. However, whether such a measure alone can achieve its goal, especially whether it can be said to have created a new system, may depend on the process of interaction between subsequent practice and legislation. However, I have a judgment that although the Trump team and the U.S. Congress have a deep understanding of the dollar stablecoin, they may not be able to fully imagine the long-term impact of this matter. IN THAT SENSE, PUSHING FOR THE GENIUS BILL IS RISKY. Will the future be as repetitive as his trade war policy? Observation is required.

2. Two Dollar Stablecoin Systems and Their Complex Consequences

Meng Yan: Speaking of long-term impacts, there is a popular conspiracy theory narrative in the Chinese Internet about the "currency war," suggesting that the U.S. initiated stablecoin legislation with the aim of "weaponizing" stablecoins. Do you agree with this statement?

Xiao Feng: The "currency war" has been a popular narrative over the past decade or so. From the perspective of other countries, it is indeed necessary to fully assess the impact of the US dollar stablecoin. The legislative push for tokenizing fiat currency is unprecedented in the history of world currencies and is bound to trigger a series of complex economic and financial reactions, the consequences of which no one can fully predict, not even the US President and Congress. However, concerning the content revealed by the GENIUS Act, there are at least two issues that need special attention.

The first is that sovereign currency borders have become more fragile. At present, the use of currency is bounded by the administrative division of the state, and the sovereign state has a monopoly on the internal currency and controls the exchange of foreign exchange on the border. This governance mechanism has been around for hundreds of years. Once the US dollar stablecoin was applied on a large scale, this mechanism was broken. Blockchain transforms the Internet into a payment network and financial infrastructure, so that money no longer depends on the traditional banking system and clearing network, but can penetrate into the micro level of another economy like a capillary through smart contracts, encrypted accounts and peer-to-peer transmission mechanisms, covering daily consumption, labor payment, cross-border e-commerce, freelance settlement, and even AI-to-AI and machine-to-machine payment behavior. At this stage, stablecoins are no longer just a payment tool, but a financial infrastructure that can be embedded in other countries' economic systems. It is able to "incorporate" part of the economic activities of other countries into its own economic map, essentially forming a new mechanism for the expansion of the monetary network. This poses a structural challenge to the existing sovereign monetary and financial regulatory frameworks, as well as macroeconomic policy control tools. Because you have built on the banking system, foreign exchange controls, payment and settlement rules, you are becoming more and more vulnerable to blockchain and stablecoin technology.

**Meng Yan: The situation you mentioned has already happened. In some countries in Africa, Southeast Asia, and Latin America, their fiat currencies have depreciated year after year, and young people use USDT and other dollar stablecoins in large numbers, which has caused headaches for the monetary authorities of these countries. When I was on a business trip to Ghana last year, local central bank officials told me that dollar stablecoins were spreading like wildfire among young people in Ghana and Nigeria, weakening the status of fiat currencies in their home countries. They asked me how I could fend off the invasion of dollar stablecoins through technical means, and I couldn't answer. Because your national currency depreciates by 20-30% every year, it's no wonder that people don't use dollars. **

Xiao Feng: This is just the beginning, and with the development of dollar stablecoins, the second problem will arise, which is the complex ecology that may emerge from the offshore dollar stablecoin system. ACCORDING TO THE GENIUS ACT, INSTITUTIONS OUTSIDE THE UNITED STATES CAN ALSO ISSUE U.S. DOLLAR STABLECOINS, BUT THEY MUST BE BASED ON U.S. FIAT ASSETS, REGISTERED IN THE UNITED STATES, REGULATED BY RELEVANT U.S. AUTHORITIES, COMPLY WITH RELEVANT U.S. LAWS, AND RESPOND TO ORDERS FROM U.S. LAW ENFORCEMENT AUTHORITIES AT ANY TIME. These requirements are very high, but it is important to understand that these requirements are a condition of "legal circulation in the U.S. market". Without access to the U.S. market, without exposure to U.S. people and U.S. entities, then even these conditions can be relaxed. In fact, this is equivalent to opening up a grayscale space, conditionally allowing foreign institutions to mint dollars. As a result, there will be two systems in the future, the onshore dollar stablecoin and the offshore dollar stablecoin, similar to today's dollar and Eurodollar systems. Among them, the onshore dollar is more strict and consistent, while the ecology of the offshore dollar will be more complex, and dozens or even hundreds of digital currencies called "dollar stablecoins" will circulate, circulate, map, exchange, and interact in dozens of public chains and hundreds of private chains of the two systems, which will produce complex effects that no one has seen before and no one can foresee.

Meng Yan: Is it possible to think that this is actually the United States ceding part of the minting rights to foreign non-bank institutions, and decentralizing the minting rights of US dollar stablecoins. This reminds me of the early years of the Western Han Dynasty in China, when coinage rights were delegated and private coinage was allowed, but there is no detailed record of how these currencies interacted and what kind of economic problems they caused. Since the dawn of industrial civilization, no country has attempted to decentralize seigniorage to foreign entities, and today we are witnessing a new phase in the history of the world's monetary development. Let me make a comparison that is not necessarily appropriate, the future US dollar stablecoin is like the copper coins of the Wenjing period, there are many "brands", some are high-quality, some are low-quality, some are minted by Deng Tong, and some are minted by Liu Wei, circulating and competing in the global market. On the surface, the U.S. government has ceded some of the U.S. dollar minting rights, but in fact, through supervision and law enforcement, it has turned U.S. bonds into "copper mines" for minting copper coins, making stablecoin issuers around the world "chain stores" of U.S. dollars, greatly increasing the demand for U.S. bonds in the global economy, increasing the penetration of U.S. dollars, and amplifying the long arm of U.S. financial supervision.

Xiao Feng: Yes, but the actual situation will be more complex. When trade frictions lead to "anti-globalization," a trend of "dollarization" in the global digital economy emerges. As AI advances rapidly, the "value internet" suddenly accelerates. These complex reactions of economic and technological trends exceed everyone’s predictive capabilities.

In particular, the offshore dollar stablecoin system will appear at multiple levels, which will attract many financial institutions, Internet companies and even sovereign countries to participate, and a particularly rich and complex ecology will emerge. From foreign-issued high-grade offshore dollar stablecoins that fully comply with U.S. regulatory rules and can be circulated in the U.S., to local U.S. dollar stablecoins that follow the regulation of other sovereign countries but do not enter the U.S. and do not touch Americans, to "wild" non-compliant U.S. dollar stablecoins, as well as various problems such as counterfeit currency, over-issuance, and dirty money that will inevitably occur, on the one hand, it will lead to a sharp amplification of the "brand effect" of the U.S. dollar, and the global spread of the psychological anchoring effect of the U.S. dollar as a "unit of denomination". On the other hand, the ultra-complex monetary system is bound to pose unprecedented challenges to the regulatory and financial stability of countries around the world and the United States. In the early stage, it is very likely that the regulatory capacity of the United States will not be able to keep up with or reach it, and it may even lead to policy reversal. In short, the real world will be very exciting and very messy. I can safely say that we will enter a period of ecological explosion of the digital economy, and soon see many new digital economy phenomena and business species.

At this stage, the discussion on this issue is still very inadequate. Especially on the Chinese Internet, there is a serious lack of discussion. However, I still believe that the main purpose of the US dollar stablecoin is to follow the trend of technological development and preemptively consolidate the position of the US dollar, rather than aiming to attack the current international monetary system. The so-called "weaponization" is the "by-product" effect of the disruptive technological advantages of blockchain. It is easy to be misled if the issue is discussed emotionally. At present, in Chinese Internet public opinion, conspiracy theories and struggle narratives are very fashionable and enjoyable, and we must pay special attention to prevent being misled by emotions and standing on the opposite side of the historical trend. Quite simply, if this is a currency war, should it be guarded against? Do you want to continue to block the whole set of technologies such as blockchain, tokenization, and crypto finance? If you think about the problem this way, you will make a big mistake.

We must understand that the "aggressiveness" of blockchain stablecoins is to naturally absorb and bind more real economic activities under the framework of higher efficiency, lower cost and fewer links. Its expansion is based on technological superiority, relying on efficiency, institutional design, technological superiority and network effects, which cannot be resisted for a long time. We admit that it has the characteristics of disruptive innovation, which is aggressive and destructive to the existing technical system, and it is not an exaggeration to say that it is a dimensionality reduction attack. But what kind of attitude should we have towards it? Isn't the use of hot weapons against cold weapons a dimensionality reduction blow in history? Is the steam engine a dimensionality reduction blow to human and animal power? Isn't the Internet a dimensionality reduction blow to postal and telephone networks? So which side are you on?

My attitude has been consistent for the past ten years. In the face of technology like blockchain, we should adapt to the trend and develop our stablecoin ecosystem in an open, compliant, and trustworthy manner, securing a place in the new generation of financial networks. Some talk about currency sovereignty and financial sovereignty, but I want to say that in the face of disruptive technological innovations, actively responding is the truly responsible approach to sovereignty.

3. The breakthrough of stablecoins is ultimately a victory of technological innovation.

Meng Yan: The United States took the lead in promoting stablecoin legislation, but it still has its peculiarities. This peculiarity lies in the fact that the first to come out and eat crabs turned out to be the world's largest and most advanced economy, to promote the world's most important reserve currency to take the lead in reform. For many countries, it may be more prudent to do some experiments in less important economies with less important currencies and move forward slowly. But now the attitude of the United States is equivalent to pushing a stormy change directly in front of everyone, which has indeed formed a forced situation, giving everyone a Sphinx-style dilemma: answer me, or I will eat you.

So in the face of this challenge, many people have a defensive mentality out of a stress reaction. In particular, the media has been promoting how blockchain is used for money laundering, illegal financing and illegal transactions every day, and reporting all kinds of speculative stories every day. This mentality is understandable. **

Xiao Feng: The mentality is understandable, but we still have to use first principles and return to the original point to think. Now we are discussing the topic of blockchain and stablecoins, there are too many macro discussions, as soon as we open our mouths, we are talking about the monetary system, the hegemony of the dollar, and financial wars, but the micro discussions are very insufficient. Many of us forget that the number one driving force for the development of stablecoins has always been technological innovation, which is to create value for ordinary users and consumers. The reason why stablecoins have such a big impact is rooted in a series of technical advantages given to them by the blockchain. I have been talking about these contents for ten years, but it is not enough, it is necessary to repeat it at this moment, and we must make everyone understand that the technology of blockchain really has great advantages, it will definitely succeed, and no one can stop it.

Meng Yan: It is indeed very important to clarify this principle. I saw you mentioned in a speech that you have been fascinated by blockchain for ten years and have not changed your original intention. Could you summarize again what technical advantages of blockchain have captivated you?

Xiao Feng: Its fundamental technical advantages are reflected in four aspects: accounts, ledgers, accounting methods, and accounting units.

In terms of accounts, traditional finance relies on bank custody accounts to record all our economic activities, but in the blockchain, there is no bank account, and digital asset wallets are replaced, called crypto accounts. The creation of crypto accounts is done by the users themselves through cryptography tools, self-creation, and self-custody of assets. From the perspective of the ledger, the public chain is a global public ledger, global liquidity, no administrative divisions can be restricted, and there are no boundaries of geographical space and time. In terms of bookkeeping methods, distributed bookkeeping and double-entry bookkeeping are different, and the clearing and settlement mode is also different. Traditional finance is net settlement, blockchain is transaction-by-transaction settlement, and the bank and goods are settled, which is the so-called payment that is, settlement, and payment, clearing, and settlement are completed in one go. If you want to use fiat currency as the unit of account, it is useless to give orders, so you must first tokenize fiat currency and create a digital twin of fiat currency on the chain.

These technical advantages may seem abstract to say, but when they are reflected in the application, they will provide tangible benefits to users. We judge whether a new technology has an overwhelming advantage, in fact, there is a simple way, that is, you look at how many times the efficiency has improved, and how many times the cost has decreased. A tenfold advantage is a generational replacement, and if it is a hundredfold and thousandfold advantage, it cannot be stopped by any force. For example, if a car is about ten times faster than a horse-drawn carriage, then the whole system of horse-drawn carriages will inevitably be obsolete. The cost of the Internet is 100 times lower than that of the telegraph, telephone, and television networks, so when the Internet first appeared, many people also spared no effort to block Internet telephony and online video applications, but what was the result? These networks have now been replaced by the internet. In the face of such a huge technological superiority, no reason for conservatism or resistance is valid.

I've always said that users' needs for finance are eternal, and it is necessary to borrow money easily and receive it quickly. Let's compare this remittance efficiency. Sending money from Shanghai to the U.S. can now take days or even weeks; With blockchain stablecoins, it can be received in a few seconds. How many times is this efficiency gain? There is a more extreme case, I recently sent money from Hong Kong to Shanghai, only to confirm the failure after a month, and if I use stablecoins, it may be completed in 10 seconds, how many times is this efficiency improvement? It could be tens of thousands of times, hundreds of thousands of times. With such a huge technological advantage, can any force stop it?

Let me give you another example. It is difficult to achieve 24/7 uninterrupted operation in traditional trading systems. Some of the leading stock trading systems are now looking to extend their trading hours, and some are already planning to trade 23/5, 23 hours a day, five days a week, but it still has to stop for one hour a day, because in the traditional clearing and settlement system, there needs to be a point in time to pause, netting, and netting. But you see, we do payments and transactions on the blockchain, and they all run around the clock. Why? It is because of the just-mentioned that it is a one-by-one settlement of silver and goods on the global ledger, so it can achieve uninterrupted clearing and settlement. I've heard that NASDAQ is doing a 24/7 trading system, and I'm guessing it's going to use blockchain technology internally. Once this is done, investors around the world can use US dollar stablecoins to trade U.S. assets without interruption, and the implications for investors and U.S. companies are self-evident. So you see, these macro-strategic discussions, in the final analysis, are still based on technological innovation.

There are many other advantages, such as intermediary-free, peer-to-peer, borderless, second-level arrival worldwide, near-zero fees, automated and irrevocable transactions on smart contracts, etc., users will come out as soon as they compare, do you still need to convince anyone? It's like comparing an electric motor with a steam engine, an electric lamp with a gas lamp, and an integrated circuit with an electron tube. This is an obvious fact. If we understand the above basic technical facts, we will come to a simpler conclusion - the fundamental starting point of the United States to promote stablecoins is to follow the trend of technological development and promote the modernization of payment and financial infrastructure.

Of course, such a strategy must have multiple considerations, and there must be the angle of maintaining the hegemony of the dollar, the angle of competition in the monetary and financial system, and even the angle of the Trump family making money. However, all of these considerations are based on the fundamental fact that blockchain has overwhelming technological advantages as a next-generation financial infrastructure. An important reason why many people regard blockchain as a flood beast is that they do not have a deep understanding of the inherent advancement and inevitability of blockchain technology. I often say that the situation is stronger than the person. If you can block it, of course you can discuss whether to block it or not, and if you can't block it at all, then what's the point of discussing how to block it? Knowing that it cannot be done will only delay the opportunity and fall behind in the new round of competition for financial infrastructure and monetary and financial systems.

I am very excited about the early passage of the Hong Kong stablecoin bill; it is the right response.

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