RMB Internationalization: Bank of America Weighs in on Pros and Cons of Stablecoins
Bank of America analysts have expressed concerns that stablecoins, commonly used as a store of value and means of exchange, may not be a significant catalyst for the internationalization of China’s currency, the RMB. While some investors view stablecoins as a potential tool to boost the global status of the RMB by increasing demand and creating a system that bypasses the SWIFT payment network, the analysts at Bank of America remain cautious.
According to their note, RMB internationalization is better achieved through bilateral agreements for cross-border settlements in local currencies and improving the RMB’s liquidity and stability. The bank believes that stablecoins face challenges in user adoption, issuers’ profitability, and compliance risks, despite some growth potential. One promising use case for stablecoins is in cross-border payments, where they can offer near-instant settlements at a much lower cost than traditional payment methods.
However, the analysts at Bank of America point out that this potential is limited by the small size of the offshore CNH pool and volatile blockchain "gas fees" in high-volume situations. In terms of broader use cases beyond cross-border payments, the bank sees limited growth potential for stablecoins in retail and trading due to China’s high mobile payment penetration, unavailability of crypto trading, and preference for other safer haven currencies for value storage purposes.
Furthermore, the report highlights profitability challenges for issuers of stablecoins. Short-term government bond yields in China are only 1-2%, which is far below levels that support interest-based income models typical for some stablecoin issuers. The bank emphasizes that RMB internationalization depends on factors like liquidity, stability, and investor confidence rather than its form.
The analysts at Bank of America believe that expanding swap lines and local currency settlement remain a more effective way to advance RMB internationalization. As such, they conclude that stablecoins are unlikely to be a major catalyst for the global acceptance of the RMB.
Why Stablecoins Face Challenges
Despite some growth potential, stablecoins face several challenges in terms of adoption, profitability, and compliance risks.
- User Adoption: Stablecoins require widespread acceptance by users in order to gain traction, but this is hindered by various factors including regulatory uncertainty, volatility risk, and market lack of trust.
- Issuers’ Profitability: The business model for stablecoin issuers relies heavily on attracting new users and investors. However, with short-term government bond yields at only 1-2%, issuers struggle to sustain profitable operations through interest-based income models.
- Compliance Risks: Regulatory frameworks around cryptocurrencies and decentralized Finance are still evolving worldwide. Stablecoins often get caught in the crossfire of debates over how to regulate these innovative financial instruments.
The Pros of Stablecoins in Cross-Border Payments
When used correctly, stablecoins can offer several benefits in cross-border payments, particularly when it comes to speed and cost savings.
- Near-Instant Settlements: Blockchain-based transactions enable real-time execution without the need for intermediaries, thereby reducing processing times and increasing efficiency.
- Cost Savings: The lower transaction fees associated with using stablecoins can significantly save costs for cross-border payments compared to traditional bank transfer methods.
- Reduced Intermediary Risk: By leveraging decentralized Finance technology, users can bypass correspondent banking networks and reduce the risk of payment blockages or delays due to failed intermediary relationships.
Conclusion
RMB internationalization is a multifaceted challenge with several variables influencing its success. While stablecoins may have some potential applications in specific markets, such as cross-border payments, they are unlikely to be a major catalyst for the global acceptance of the RMB according to Bank of America analysts. The most promising solution to advance RMB internationalization comes from expanding swap lines and adopting local currency settlement.
