First Mover Asia: A Chinese Alternative to Dollar-Based Stablecoins? Widening the Use of the CNH Presents Challenges; BTC Remains Above $20K
By Sam Reynolds, James Rubin
The token is a version of China’s currency designed for offshore use; other cryptos are mixed in light trading.
Prices: Bitcoin holds above $20,000; other cryptos are mixed.
Insights: China’s CNH token looks promising as an alternative to dollar-based stablecoins, but the challenges to expanding its use are formidable.
Bitcoin (BTC): $20,415 +0.4%
Ether (ETH): $1,104 -2.2%
|Polkadot||DOT||+4.7%||Smart Contract Platform|
|Avalanche||AVAX||+4.1%||Smart Contract Platform|
|Terra||LUNA||−5.1%||Smart Contract Platform|
|Ethereum||ETH||−1.5%||Smart Contract Platform|
|Stellar||XLM||−1.1%||Smart Contract Platform|
Bitcoin Holds Above $20K; Other Cryptos Are Mixed
A couple of Monday midday dips notwithstanding, bitcoin clung stubbornly to the perch above $20,000 it reassumed during the weekend.
The largest cryptocurrency by market capitalization was recently trading at about $20,400, roughly flat over the past 24 hours. Bitcoin had surged on Sunday after a pause in the ongoing flood of bad economic, geopolitical and industry news that has plagued all digital assets, although markets remain unsettled.
“Bitcoin is still being whipped by winds of worry as the investors flee the crypto world in their race away from risky assets,” wrote Susannah Streeter, senior investment and markets analyst for financial services firm Hargreaves Lansdown.
Ether, the second-largest crypto by market cap, was down about 2%, changing hands just above the $1,100 position it reclaimed late Sunday. Other major altcoins were mixed with FTT up over 9% at one point, but XLM and XRP slightly down. DOGE rose earlier in the day after Tesla founder Elon Musk tweeted that he would “Keep supporting Dogecoin,” but was in the red by the afternoon.
Equity markets were closed and crypto trading was light as the U.S. celebrated the Juneteenth holiday. Major stock indexes elsewhere were mixed with Japan’s Nikkei down a few fractions of a percentage point, but Hong Kong’s Hang Seng up slightly after China left its one- and five-year lending rates intact. Europe’s Stoxx 600 rose .9%, despite a report that German producer prices rose 33% last month.
Investors remain worried about inflation, geopolitical turmoil and the prospect of a global recession. Brent crude oil, a measure of energy markets whose price has risen sharply since Russia’s invasion of Ukraine, is trading at $114 per barrel, up over 46% since the start of the year.
Cryptos received a sliver of good news when the CEO of Hong Kong-based cryptocurrency exchange Hoo.com tweeted early Monday that his company will open withdrawals for some tokens after announcing on Sunday in a blog post that it would be delaying withdrawals for 24 to 72 hours. Still the mood about crypto was downbeat.
“The HODLer mentality is really being put to the test and those that haven’t bailed yet may be as tempted as they’ve ever been,” Craig Erlam, senior market analyst for foreign exchange broker Oanda, wrote in an email.
Hargreaves Lansdown’s Streeter noted that although cryptos have suffered from “extreme volatility in the past, the indications are that this decline may not be reversed any time soon and that a crypto winter could be settling in.”
(Friday, June 17 close)
S&P 500: 3,674 +0.2%
DJIA: 29,888 -0.1%
Nasdaq: 10,798 +1.4%
Gold: $1,838 0% (Monday, June 20)
The Challenges of Expanding the Use of the CNH Currency Are Formidable
The best thing for U.S. dollar dominance has been the emergence of crypto, specifically stablecoins. The $156 billion stablecoin sector is almost entirely dollar-denominated. As stablecoins become an instrument of international trade, all this has done is reinforce dollar hegemony over a new part of the global economy.
Beijing is perpetually annoyed by the dollar dominance of the global economy as this means U.S rules reign supreme. A recent episode with Huawei, exports to Iran and a dollar-denominated loan come to mind.
But can a solution be found in a stablecoin based on the CNH, a version of China’s currency designed exclusively for offshore use? While theoretically intriguing, widening the use of CNH would be difficult.
Capital controls and stablecoins
Given China’s country’s capital controls, where only $50,000 in foreign currency can be bought per entity, there’s demand for tether (USDT) and USDC from anyone that needs to send a significant amount of capital outside the country.
Despite the difficulty capital controls create for international business in China, it’s still a pillar of the People’s Bank of China’s (PBoC) fiscal policy because of the stability it creates for the yuan. A currency that’s not freely convertible is more stable because it’s not exposed to the same market forces as freely convertible currencies like the U.S. dollar, euro, Canadian dollar or Japanese yen.
But this means that despite China’s status as the world’s second-largest economy, and arguably the most important, the yuan’s global share isn’t proportional to this status. Given that it can’t be used offshore, the yuan only accounts for around 2% of global payments.
At the same time, Beijing wanted a way to access foreign capital while maintaining the capital controls on the yuan. So in 2010, it launched the CNH, an “offshore” version of the Chinese yuan initially offered in Hong Kong but later in Singapore and Luxembourg, to spearhead the “Dim Sum” bond market – yuan-denominated bonds issued by domestic Chinese firms that are designed to exist outside China’s capital controls to attract international capital.
Remember that the CNH isn’t a real currency; there’s not really a use for it outside buying and trading “dim sum” bonds.
Making a stablecoin from this currency, as CNH coin proposes, is going to be difficult. The entire market cap of the dim sum bond market, the primary use case for CNH, has a market cap of just over 80 billion which is around the same size as USDT at its peak.
In the end, there might not be enough CNH in issuance to create a stablecoin that’s a serious challenger. This isn’t a problem unique to the CNH, as attempts to create a stablecoin from the Singapore dollar have also run into the wall of supply.