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This article revolves around (the rise and challenges of cryptocurrencies), introducing cryptocurrencies as blockchain-based digital currencies that have three types: payment, stablecoins, and sovereign digital currencies, with seven characteristics. The cryptocurrency market is developing rapidly, as seen with the soaring price of Bitcoin and its explosive market value. The positions of the U.S. political and business sectors have shifted, aiming to build a "digital dollar hegemony system," while the EU promotes unified regulation and green transformation, and other global economies face competition between stablecoins and sovereign digital currencies. China has both advantages and disadvantages in the blockchain and cryptocurrency field, and the U.S.-led hegemony strategy for crypto assets poses multiple threats to China's financial security.
The theme I want to share today is (the rise and challenges of cryptocurrencies). Cryptocurrencies are a type of digital currency that operates through computer networks, with the ownership of each cryptocurrency unit recorded and stored in a digital ledger or blockchain. The blockchain is the underlying technology of cryptocurrencies, with its core being consensus mechanisms like Proof of Work (PoW). Cryptocurrencies mainly include three major types: first, payment cryptocurrencies, such as Bitcoin and Ethereum; second, stablecoins, the most famous being dollar stablecoins USDT and USDC; third, central bank digital currencies, also known as sovereign digital currencies, with larger-scale representatives like China's digital yuan. Cryptocurrencies mainly have seven characteristics: namely, distributed; security; scarcity; anonymity; high volatility in price trading; massive energy consumption generated during the mining process; and global instant trading without considering currency exchange costs and international transfer time costs.
Since January 2009, when Satoshi Nakamoto (team) mined the first block of Bitcoin (Genesis Block), cryptocurrencies have gradually occupied a place in the financial ecosystem, evolving from a niche virtual currency experiment. Currently, over 130 countries and regions have begun to include various forms of cryptocurrencies in discussions about mainstream financial systems. In the context of increasing global geopolitical turmoil, high U.S. fiscal deficits, and rapidly rising U.S. national debt, cryptocurrencies represented by Bitcoin are gaining widespread attention. Recent trends indicate that the U.S. government is accelerating the construction of a triadic "digital dollar hegemony system" through national strategic reserves, cryptocurrency legislation, and the development of crypto financial infrastructure, attempting to extend its traditional financial global hegemony into the digital economy era. Against this backdrop, I focus on elaborating on the global situation of cryptocurrency development and the risks and challenges involved.
I. The latest trends in global cryptocurrency development.
(1) The cryptocurrency market is experiencing breakthrough progress.
In January 2024, the Bitcoin spot trading fund ETF was approved for official launch, marking a significant event in the integration of crypto assets and traditional financial assets. In December of the same year, the price of Bitcoin broke through 100,000 USD per coin, driving the total market value of cryptocurrencies from 800 billion USD to 3.4 trillion USD in just two years. At the same time, the total market value of crypto assets has increased its liquidity ratio against the six major central banks (G6) from less than 1% in 2009 to 12% by the end of 2024. In the mainstream market, the investment attributes of Bitcoin are shifting from niche risk assets to mainstream major assets. The newly elected Trump administration's proposed establishment of a strategic Bitcoin reserve plan (SBR) further stimulates and reinforces this transition process.
Figure 1: Global capital began to flood into the cryptocurrency market in the second half of 2023.
Since the second half of 2023, the U.S. government has shown a significant shift in its regulatory stance towards the cryptocurrency sector, with its strategic intention likely to extend the traditional financial hegemony of the U.S. into the digital financial domain. In the context of soaring U.S. government debt and high inflation, this strategy can ensure the centralized position of the dollar in the waves of digital financial transformation while also supporting and alleviating the increasingly severe federal debt situation. This strategy may include short, medium, and long-term goals: in the short term, the U.S. government is attempting to build the preliminary framework for global digital currency hegemony through three major means: establishing cryptocurrency strategic reserves, encouraging the expansion of dollar stablecoins, and controlling the core infrastructure of crypto asset trading; in the medium term, by maintaining a loose regulatory environment, tax incentives, and long-arm financial sanctions, continuously attract (or coerce) leading global crypto enterprises to migrate to the U.S. or into the U.S. regulatory system, promoting industry agglomeration, employment, and economic growth, while maintaining the U.S.'s leading position in blockchain technological research and development; in the long term, the U.S. will ensure that it always holds centralized power in the trend of decentralization in the digital economy by dominating the formulation of global digital financial infrastructure and rules, ensuring the dollar's centralized position in global investment and trading in the digital economy.
Figure 2: The surge in cryptocurrency scale in the second half of 2023, entering the mainstream asset market.
(II) The shift in the positions of the U.S. political and business sectors towards cryptocurrencies and their strategic intentions.
1. Since the second half of 2023, five significant shifts have occurred in the U.S. government and industry in the cryptocurrency sector.
First, the position of U.S. financial regulators has shifted from 'harsh suppression' to 'guiding regulation.' The new chairman of the Trump administration, Paul Atkins, is a long-time supporter of cryptocurrencies and has actively promoted the compliance path for crypto assets since taking office, reflecting the new U.S. government's positive support for crypto assets and the trend of seeking a new balance between financial innovation and financial investment protection. In December 2024, the SEC approved Franklin Templeton's crypto index ETF (EZPZ) for trading on NASDAQ, marking a significant turning point in the U.S. financial regulatory stance.
Second, from legislative suppression to legislative support. The U.S. Congress is actively promoting the crypto regulatory legislation 'dual pillars' - the (21st Century Financial Innovation and Technology Act) (abbreviated as FIT21) and the (Guidance and Establishment of the U.S. Stablecoin National Innovation Act) (abbreviated as GENIUS). The FIT21 Act will comprehensively establish the foundational framework for crypto regulation, addressing various classification and jurisdiction issues, clarifying the regulatory boundaries between the SEC and CFTC (U.S. Commodity Futures Trading Commission), formulating standards for identifying the commodity and security attributes of digital assets, and establishing a legal framework for institutional digital asset custody businesses. GENIUS aims to establish a comprehensive regulatory framework for stablecoins and bring the two major currencies - USDT and USDC, which account for 90% of the total global stablecoin market value, under regulatory scope. FIT21 has passed the House of Representatives with bipartisan support in May 2024, and it is expected to pass the Senate and be signed into law by 2025. GENIUS is scheduled for Senate voting in March of this year. Once these two bills are passed, the U.S. will form the most complete crypto regulatory system globally, significantly influencing the innovation direction and market landscape of the cryptocurrency industry.
Third, the transition from a harsh crackdown attitude to a policy of strategic assetization. The Trump administration plans to introduce 1 million strategic Bitcoin reserves and incorporate them into the Treasury's currency stabilization fund. In January of this year, Trump signed an executive order (Strengthening the Leadership of the U.S. Digital Financial Technology Field), which mainly includes preparations for establishing a Bitcoin strategic reserve (SBR) and banning the establishment, issuance, or promotion of any form of central bank digital currency within or outside the U.S., thus striking at any potential competitors to dollar stablecoins.
Fourth, the industry has shifted from hesitance to a more proactive response. Many star companies such as Apple, Tesla, and MicroStrategy have already included or plan to include crypto assets in their corporate asset allocation. Traditional large financial institutions (such as the world's largest asset management company BlackRock) are also accelerating their accumulation of Bitcoin. The global Bitcoin ETF fund's assets have surpassed 1.1 million BTC, of which the BlackRock Bitcoin ETF (IBIT) accounts for 45% (with a market value of approximately 153 billion USD as of February 2025). The spot Bitcoin ETF attracted over 108 billion USD in funding in 2024, accelerating the integration of the crypto market with traditional financial markets.
Fifth, adjustments to tax policies. The U.S. Internal Revenue Service allows taxpayers to flexibly choose accounting methods for crypto assets in the temporary tax relief of 2025, temporarily alleviating the tax pressure on CEX users, but in the long term, it may drive crypto investments to concentrate on platforms controllable by U.S. regulatory authorities.
2. The latest dynamics across various fields of crypto assets indicate that the shift in the positions of the U.S. political and business sectors is likely aimed at building a 'triadic' digital era dollar hegemony system.
The three main pillars of this system are Bitcoin strategic reserves (SBR), dollar (pegged) stablecoins, and U.S. controllable digital financial infrastructure. In this system, Bitcoin strategic reserves may play the role of gold reserves in the 1944 Bretton Woods system agreement. Bitcoin, as "digital gold," occupies a core value anchoring position and will bring five potential strategic advantages to the U.S.
First, the first-mover advantage. As the most widely recognized cryptocurrency globally, Bitcoin's unique position favors it as a safe haven for funds during global geopolitical turmoil and high inflation periods. The United States took the lead in incorporating Bitcoin, which accounts for over 60% of the entire cryptocurrency market value, into its national strategic reserves, and this first-mover advantage is conducive to attracting international capital to continue converging on on-chain and off-chain dollar assets in the future.
Second, the role of a new financial stability tool. During periods of financial crisis, Bitcoin's low correlation with traditional assets makes it a second financial stability tool for the U.S. government, assisting in supporting the balance sheets of systemic financial institutions in the U.S. beyond traditional dollar quantitative easing in certain emergencies, protecting the international status of the dollar.
Third, enhancing the competitiveness of the dollar system in the digital age. Stablecoins pegged to the U.S. dollar currently account for 95% of the global stablecoin total market value, coupled with crypto asset transactions that are not dollar-pegged but primarily settled in dollars, will further consolidate the dollar's central currency status in the digital age, helping to extend the dollar's dominance in the global currency system from traditional finance to the digital finance domain.
Fourth, strengthening the U.S. standard's voice in the digital finance era. In the future, by occupying the dominant position in the crypto market through strategic reserves and dollar stablecoins, the U.S. will lead the formulation of global crypto asset rules and solidify based on GENIUS and FIT21's dual pillars through international platforms like G7, IMF, and BIS, promoting a global crypto asset regulatory framework that aligns with its interests, thereby ensuring its top-level voice in the formulation of international digital asset rules.
Fifth, to curb the development of potential competitors' crypto assets. Through financial sanctions and legislative restrictions, the development of digital assets in competing countries is limited, and administrative orders and legislation strictly prohibit any institution from establishing, issuing, and promoting CBDCs within the United States. By providing technical assistance, the U.S. attracts emerging markets to adopt a U.S.-led payment system, squeezing the internationalization space of competitors' digital currency assets.
Figure 3: The 'triadic' U.S. digital currency hegemony system.
3. The EU's policy direction in the cryptocurrency sector is unified market regulation and green financial transformation.
This is mainly reflected in the following three aspects: First, the EU's (Crypto Asset Market Regulation Framework) (MiCA) will come into full effect on December 31, 2024, aiming to establish a unified and clear regulatory framework for crypto assets across the EU. It will classify all crypto assets into three categories and implement differentiated regulation, while strengthening compliance requirements for stablecoin issuance and crypto asset exchanges. While managing risks, it promotes innovation and ensures consumer rights and financial stability. Second, the unified regulatory framework lays the foundation for the EU to gain active rights and voice in the global cryptocurrency market. Third, it guides the establishment of a green financial development path for cryptocurrencies, with MiCA imposing high carbon emission taxes on energy-intensive blockchain operations, promoting the crypto industry to transition from PoW mechanisms to low-carbon consensus mechanisms like PoS, thereby reshaping the regional landscape of the mining industry.
4. Other global economies face competition between stablecoins and sovereign digital currencies.
This is mainly reflected in three aspects. First, the number of economies exploring and promoting CBDCs is continuously increasing. Currently, about 130 countries and regions around the world are exploring and promoting CBDCs. China's digital yuan has continuously expanded its domestic and cross-border pilot programs in recent years, making it the largest sovereign digital currency globally. Japan, South Korea, India, Russia, and 18 other G20 member countries are also accelerating their layouts for CBDCs or Bitcoin strategic reserves, actively striving for digital financial sovereignty and rule-making power. Second, the competition between sovereign digital currencies and stablecoins. The CBDC model has sovereign advantages, but dollar stablecoins already possess scale advantages. From 2020 to 2024, the market value of USDT surged 5.52 times, while USDC rose 11.35 times, with both accounting for 90% of the global stablecoin total market value. By 2024, the settlement volume has reached 15.6 trillion USD. Third, future digital currencies face regionalization and fragmentation risks. The U.S. is attempting to strengthen its digital financial hegemony through three major means: establishing SBR reserves, stablecoin legislation, and restricting the issuance and circulation of CBDCs. The EU's MiCA framework will objectively limit the development of non-euro stablecoins. Intensified competition means that the global digital financial payment system may face market segmentation and fragmentation risks in the future.
5. Stablecoins are becoming the frontier of the integration of crypto financial assets and traditional financial assets.
This mainly presents two typical facts. On one hand, stablecoins have enhanced the resilience of off-chain dollar assets. In the fiscal year 2023-2024, the market value of stablecoins has rapidly increased and surpassed the growth rate of U.S. M2, effectively supporting the demand for dollars and U.S. Treasury bonds in an uncertain financial environment with persistently high deficits in the U.S. On the other hand, stablecoins are gradually entering mainstream payment channels. In the first 11 months of 2024, the stablecoin market completed transactions worth 27.1 trillion USD, which included a large number of P2P and cross-border B2B payments, indicating that businesses and individuals are increasingly utilizing stablecoins to achieve commercial value while meeting regulatory requirements, closely integrating with traditional payment platforms like VISA and Stripe.
II. The risks and challenges posed by the new trends in cryptocurrency development to China.
1. Objectively view the current advantages and disadvantages of China in the blockchain and cryptocurrency fields.
The advantages mainly lie in three aspects: First, the leading layout of the digital yuan and blockchain industry. In the central bank digital currency field, the digital yuan is currently the largest CBDC project globally and has received national strategic support. Since its research and development began in 2014, it has steadily advanced, covering various fields such as retail, wholesale payments, and cross-border settlements. Since 2021, the development and practice of the cross-border digital currency bridge project (mBridge) have also been globally leading. These foundations make it likely that the digital yuan will become a financial transaction tool and asset carrier competing with dollar stablecoins in the future. In the blockchain industry, China has already included blockchain technology in its national strategy in the early stages of the industry’s emergence, clearly proposing the direction of integrating blockchain with the real economy. The industry market scale and growth potential are significant, and it is expected that China’s blockchain market will surpass 100 billion RMB by 2025, with widespread applications in finance, supply chain, government services, and other fields, as the number of registered enterprises continues to grow, reaching 63,300 by the end of 2023. Second, the richness of application scenarios. The scenarios for digital currencies have expanded from the initial fields of retail, transportation, and government services to broader areas such as wholesale, catering, entertainment, education, healthcare, social governance, public services, rural revitalization, and green finance. The blockchain industry has already seen numerous mature cases in supply chain finance, cross-border trade, and electronic government services. Third, strict risk prevention and control. China has implemented strict regulations on cryptocurrency trading and initial coin offerings (ICOs), effectively preventing risks in the virtual economy and providing a more controllable and stable industrial environment for the compliant development of digital currencies.
The disadvantages of China at this stage are mainly reflected in insufficient international competitiveness in certain areas. First, the influence of technology standards is relatively lagging. Due to differences in regulatory laws, the U.S. currently occupies a dominant position in underlying technologies such as ZKP and Layer2 scaling, while the EU establishes technical barriers through the MiCA framework, resulting in China's insufficient voice in core protocols and global standard-setting. Second, the development of public chain ecosystems is relatively lagging. China's blockchain industry mainly consists of alliance chains and private chains, and the lack of public chains leads to a gap in innovative capabilities in decentralized finance (DeFi) and Web3.0 compared to Europe and the U.S.
2. The U.S.-led hegemony strategy for crypto assets poses multiple threats to China's financial security.
First, capital outflow and exchange rate pressure. The long-term appreciation trend of crypto assets represented by Bitcoin against the dollar and other international currencies, along with the rapid expansion of dollar stablecoin trading scales, further strengthens the dollar's dominant position in the global currency system through cross-border payment convenience and the value storage function, which undoubtedly will squeeze the valuation and internationalization space of the RMB. Moreover, dollar-dominated crypto channels have become a new path for capital outflow. In recent years, large-scale allocation of Bitcoin by leading U.S. companies and the massive financing wave of on-exchange crypto ETFs have generated a strong 'demonstration effect,' potentially attracting some domestic capital to flow out through gray channels.
Second, the regulatory arbitrage of DeFi has formed an accumulated industrial competitive advantage. The relatively loose regulatory and tax policies in the U.S. attract global DeFi innovation resources, thereby reaping more technological dividends across the entire chain from underlying standards to application layers. After long-term accumulation, this may form a competitive advantage against China's digital financial infrastructure technology in the future.
Third, the competition for underlying technology standards and innovation capabilities. On one hand, the U.S. currently holds a leading position in innovation in areas like ZKP and Layer2, while the EU is also integrating regulations through MiCA to gain the network effects of a unified large market while setting technical barriers. China needs to be vigilant against the risk of losing the right to formulate industry standards for crypto assets. On the other hand, China is facing pressure from the outward migration of innovation resources in the blockchain industry: the EU's carbon emission policies for the crypto industry and the U.S. tax incentives for mining operations have led Chinese mining and blockchain investment firms to trend towards Central Asia, the Middle East, and the U.S., which objectively hinders the innovative capacity and computing power security of the domestic blockchain industry.
Fourth, the threat of U.S. crypto asset hegemony. Firstly, the U.S. is accelerating the gradual incorporation of mainstream crypto assets into its financial hegemony system; once this trend is established, it will inevitably squeeze China's strategic development space in the digital financial sector. Secondly, after the Russia-Ukraine conflict, the U.S. government, along with the UK, UAE, and other countries, imposed large-scale long-arm financial sanctions against the Russian government, institutions, and individuals in the crypto field, seizing a large amount of crypto assets and arresting related personnel, demonstrating the initial power of its digital financial hegemony. Finally, the Trump administration's promotion of the Bitcoin strategic reserve plan and resistance to foreign sovereign digital currencies has also intensified the confrontation between China and the U.S. in the field of digital currencies.
Of course, cryptocurrencies represented by Bitcoin are currently exhibiting a severe market bubble state, and continued appreciation is difficult to sustain. Once the bubble bursts, it will be a huge blow to the U.S. crypto asset hegemony strategy. In this regard, we must maintain a clear understanding and strategic determination, steadfastly adhere to the value concept of financial services to the real economy, and resolutely follow the path of building a financial power with Chinese characteristics.
