Taiwan's Central Bank: The US Dollar stablecoin may become a shadow forex market, impacting the New Taiwan Dollar exchange rate.

The Central Bank of Taiwan recently issued a stern warning regarding US dollar stablecoins, pointing out that widespread circulation could create a “shadow forex market,” allowing businesses or individuals to circumvent the current Exchange Settlement reporting mechanism, thereby weakening the Central Bank's ability to monitor cross-border capital flows and impacting the stability of the New Taiwan Dollar Exchange Rate. Central Bank Governor Yang Jinlong recently compared stablecoins to a modern version of “wildcat banking” in a speech, suggesting their private issuance, regulatory arbitrage, and potential instability.

How is the shadow forex channel formed? Three steps to bypass Exchange Settlement

The Central Bank detailed how the US dollar stablecoin has evolved into a shadow forex market. Currently, Taiwan's foreign exchange management framework is built on the premise that all cross-border capital movements must go through legitimate financial institutions. Both corporate and individual cross-border remittances need to be reported to banks, allowing the Central Bank to grasp capital flow and maintain exchange rate stability.

However, if in the future, enterprises or individuals extensively use stablecoins for cross-border payments and transactions to circumvent the existing Exchange Settlement reporting mechanisms, it will lead to a serious regulatory gap in the current forex management system. When enterprises widely apply US dollar stablecoins for trade payment settlement, financial transactions, or cross-border remittances, it may form a parallel on-chain channel for US dollar inflow and outflow outside the formal financial system.

The specific scenario may be as follows: A Taiwanese exporter accepts payment in USDT from an overseas buyer. After receiving the stablecoin, instead of going through a bank for exchange settlement into New Taiwan Dollars, it is directly used to pay the importer in USD stablecoin, or exchanged for New Taiwan Dollars through over-the-counter (OTC) trading. The entire process completely bypasses the banking system, and the Central Bank is unable to grasp the existence of this cross-border transaction.

If this model spreads on a large scale, the Central Bank will face a double dilemma. The first is the distortion of forex reserve data, as a large amount of dollars flows in and out in the form of stablecoins, but does not reflect in official statistics. The second is the failure of exchange rate management, as the Central Bank cannot accurately assess the real supply and demand of dollars in the market, and its interventions in the exchange rate may be based on erroneous information, leading to a significant reduction in the effectiveness of policies.

More seriously, if the regulatory authority cannot grasp this on-chain information in a timely manner, some cross-border transactions will completely escape supervision and evolve into what is known as the “shadow forex market.” This will significantly weaken the Central Bank's ability to control capital flows, and in extreme cases, could even trigger financial stability risks. When large amounts of money flow out rapidly through stablecoin channels, the Central Bank may not have time to react, and the New Taiwan Dollar exchange rate will face severe fluctuations.

Yang Jinlong's wildcat banking metaphor and regulatory upgrade

Central Bank Governor Yang Jinlong cited scholars' viewpoints in his speech, comparing stablecoins to a modern version of “Wildcat Banking,” a historically powerful metaphor. Wildcat Banking refers to the chaotic period in the 19th century when private banks in various states of the United States issued paper money excessively, lacking regulation and sufficient reserves, ultimately leading to a systemic financial crisis that prompted the establishment of the Federal Reserve System.

Yang Jinlong's metaphor suggests that stablecoins have three main characteristics: private issuance, regulatory arbitrage, and potential instability. Although stablecoin issuers such as Tether and Circle claim to hold sufficient USD reserves, their transparency is far lower than that of traditional banks, and the actual status of the reserves is difficult to verify. Once a run on the bank occurs, there is great uncertainty as to whether these stablecoins can truly be redeemed for USD at a 1:1 ratio.

The Central Bank stated that in the future, in addition to strengthening monitoring measures, it does not rule out officially including information related to stablecoins as part of the observation indicators in monetary policy management, to ensure the order of the financial market. This means that the Central Bank is considering incorporating data such as the circulation of stablecoins and on-chain transaction volumes into the monetary supply statistics, redefining the total money supply figures like M1 and M2.

Furthermore, the Central Bank stated that it will revise relevant monetary statistics and definitions in accordance with the latest guidelines from the International Monetary Fund (IMF) in a timely manner. The IMF has recently issued warnings to multiple countries, indicating that stablecoins may accelerate currency substitution and weaken capital controls by central banks. The stance of the Central Bank of Taiwan shows that it has regarded stablecoins as a significant variable in monetary policy, rather than merely a cryptocurrency issue.

Three Major Response Measures of the Central Bank Regulation

Enhancing On-Chain Monitoring Capabilities: The Central Bank will establish a stablecoin transaction monitoring system to track large on-chain transfers, identify potential circumvention of Exchange Settlement activities, and collaborate with the Financial Supervisory Commission and the Investigation Bureau to establish an inter-agency information sharing mechanism.

Revised Monetary Statistics Definition: Include the circulation of stablecoins and on-chain transaction volume in the money supply statistics, redefining the total amounts of M1, M2, etc., to ensure that monetary policy is based on real capital flows.

Inclusion of Policy Observation Indicators: Related information on stablecoins will be officially incorporated into the monetary policy management framework as an important reference for assessing cross-border capital movements, exchange rate pressures, and financial stability.

The Awkward Positioning of the New Taiwan Dollar Stablecoin

In response to concerns from various sectors about whether to implement a New Taiwan Dollar stablecoin, the Central Bank analyzed in the reference materials after the board meeting that the planned New Taiwan Dollar stablecoin is similar in nature to electronic payment tokenization, falling under the “Pay Before” model, which requires pre-funding before consumption. The Central Bank further pointed out that this does not offer significant advantages compared to the current financial cards' immediate deduction (Pay Now) or credit cards' deferred payment (Pay After).

Considering that Taiwan's existing payment system is already quite完善, convenient, and cost-effective, the actual demand for a New Taiwan Dollar stablecoin on the consumer side is still up for debate. This assessment shows that the Central Bank is extremely indifferent to the New Taiwan Dollar stablecoin, believing that its existence has limited value. The Central Bank believes that the New Taiwan Dollar stablecoin currently has little impact on currency credit creation and policy transmission mechanisms, and the degree of future impact will depend on the number of practical application scenarios and the design of regulatory frameworks.

The academic community has proposed more specific risk management recommendations. Former Central Bank Vice President and current professor at National Taiwan University, Chen Nanguang, suggested that regulatory authorities should establish a clear “firewall” between stablecoin issuers and traditional deposit-taking institutions, such as appropriately limiting banks' exposure to stablecoin businesses to prevent risk contagion. Furthermore, to guard against liquidity crises that may arise from large-scale redemptions, future measures could include implementing temporary redemption restrictions or designing liquidity cost mechanisms to enhance market resilience and reduce potential risks.

Taiwan's Central Bank's vigilance towards stablecoins reflects the profound contradiction between traditional financial systems and cryptocurrency innovations. On one hand, stablecoins indeed provide more efficient cross-border payment solutions; on the other hand, their impact on forex controls and monetary policy should not be underestimated. The outcome of this game will determine Taiwan's position in the global digital finance competition.