Taiwan's Central Bank's first "stablecoin" report: Breaking three major myths, will it reshape the financial landscape of the New Taiwan Dollar?

Stablecoins, a key player in the world of Crypto Assets, are gradually coming into the sight of financial regulation in Taiwan. On September 18, after the board meeting, the Central Bank of Taiwan publicly released a significant report titled "Explanation of Issues Related to US Dollar Stablecoins and New Taiwan Dollar Stablecoins." This report not only clearly answers the impact of stablecoins on money supply and the financial system but also directly dispels the myths of TradFi, clarifying the misunderstanding that "stablecoins are like EasyCard." The Central Bank's in-depth analysis of stablecoins provides a clear policy direction for Taiwan's virtual asset market.

Central Bank Directly Addresses Core Challenges of Stablecoins: Price Stability and Capital Efficiency Hard to Achieve Together

The Central Bank report first points out that the fundamental challenge faced by the design system of stablecoins is the difficulty of simultaneously ensuring price stability and capital efficiency. For example, stablecoins like USDT and USDC, which are backed by sufficient asset reserves, have relatively stable prices but low capital efficiency; while algorithmic stablecoins like TerraUSD struggle to maintain stability, ultimately leading to their collapse.

Another core issue is market confidence. The report emphasizes that stablecoins have experienced decoupling and even issuer bankruptcies several times in just a few years. The bankruptcy of Terra and the collapse of the crypto-friendly Silicon Valley Bank (SVB) have both led to a decline in the value of USDC, dropping as low as 0.85-0.87 USD, all of which demonstrate the fragility of the stablecoin market.

US Dollar stablecoin issuance in Taiwan faces high difficulty: Genius Act sets high thresholds

With the official launch of the U.S. "Genius Act," the regulatory framework for payment-based stablecoins is becoming increasingly clear. The Central Bank report specifically mentions the stringent regulations of the Genius Act aimed at overseas issuers:

· The regulatory system of the issuer's location must be recognized by the U.S. Treasury as equivalent to the GENIUS Act.

· Register with the Office of the Comptroller of the Currency (OCC) of the U.S. Department of the Treasury.

· Hold sufficient reserve assets in US financial institutions

· The issuer's location must not be subject to comprehensive sanctions by the United States.

Central Bank analysis indicates that, in market considerations, the general public may prefer US dollar stablecoins issued by US institutions, thus Taiwanese operators do not have an advantage in issuing US dollar stablecoins.

Debunking the Myth of 'Three Types of Dollars': Central Bank Clarifies That Stablecoins Will Not Increase Money Supply

(Source: Central Bank of Taiwan)

The Central Bank report directly refuted the argument made by internet celebrity Qu Bo that "the issuance of stablecoins turns one dollar into three." Qu Bo had cited an example where issuers released four trillion dollars in stablecoins and purchased U.S. Treasury reserves, resulting in the circulation of four trillion dollars across the real world, on-chain stablecoins, and on-chain Crypto Assets, creating the phenomenon of "one dollar becoming three."

However, the Central Bank report clearly states that funds are still circulating in the monetary system, with the total amount of broad money (M3) unchanged. In fact:

What users receive is the issuer's token liability (stablecoin)

The issuer holds a claim against the U.S. Department of the Treasury (T-Bills).

The overall society is just one asset corresponding to one liability, changing forms and holders, without any new broad money. In addition, the Central Bank cited research indicating that there is no statistically significant correlation between the use of stablecoins and the outflow of bank deposits, alleviating some concerns among bankers about the outflow of demand deposits.

Stablecoins are very different from EasyCards: they can serve as a medium for transactions in the virtual market

The Central Bank pointed out that Taiwan will adopt the same approach as the European Union, placing regulations related to stablecoins within the virtual asset special law, rather than establishing a separate stablecoin law like the United States. The issuance of stablecoins involves raising funds from the general public, similar to the current electronic payment deposit funds, and both are used for payment purposes.

However, the biggest difference from electronic payments like EasyCard is that stablecoins can be used as a medium of exchange in virtual markets. In addition, although stablecoins and money market funds (MMFs) have similar investment portfolios, primarily consisting of high-quality, highly liquid financial assets, stablecoins are payment tools, while MMFs are short-term cash management tools, which is the biggest difference.

New Taiwan Dollar stablecoin: Central Bank clearly regulates reserve asset requirements

For the New Taiwan Dollar stablecoin, the Central Bank clearly stipulates that its reserve assets must adhere to the 100% trust guarantee as per the current electronic payment system. A portion of the reserve assets must be held as reserves at the Central Bank, while the remainder can refer to overseas practices, used for deposits or purchasing high-quality, high-liquidity financial assets (such as short-term bonds or bills).

The Central Bank believes that there are currently not many virtual assets priced in New Taiwan Dollars in the virtual market, so the demand for New Taiwan Dollar stablecoins is not significant. Moreover, Taiwan's payment system is quite complete, with various payment tools such as credit cards, financial cards, bank deposits, and electronic payments already in place. The impact of New Taiwan Dollar stablecoins as a payment tool on Taiwan's payment system should be limited.

Regarding the impact of Taiwan's currency supply and monetary policy, the Central Bank pointed out that the issuance of the New Taiwan Dollar stablecoin should only cause a redistribution of market funds, with minimal impact on Taiwan's broad money supply (M2) and bank credit creation. After the public purchases the New Taiwan Dollar stablecoin, the issuer will use the funds received to purchase reserve assets, and the funds will still circulate within the monetary system, keeping M2 roughly unchanged.

The research report on stablecoins by the Central Bank of Taiwan provides a clear policy direction for Taiwan's virtual asset market. The report not only clarifies the nature and potential risks of stablecoins but also debunks the myth that stablecoins affect the money supply. In the future, with the formulation and implementation of specialized laws, the development of stablecoins in Taiwan will become more certain, bringing new changes to Taiwan's financial market.