Nankai University President Chen Yulu: The Rise and Challenges of Cryptocurrency

Source: Tsinghua University Service Economy and Digital Governance Research Institute

On February 22, 2025, the Academic Annual Conference on the Development and Governance of China's Digital Economy was held at Nankai University. This year's conference, themed "Artificial Intelligence, Digital Economy, and New Quality Productivity," actively responds to the strategic call in the report of the 20th National Congress of the Communist Party of China regarding "accelerating the construction of a strong network country and digital China." It gathered the wisdom of academia and industry to jointly explore the future development direction of the digital economy. The conference invited over 40 experts, scholars, and institutional representatives to engage in in-depth discussions on core topics such as digital economy, digital finance, digital trade, data elements, and the innovative development of artificial intelligence. Nankai University President Chen Yulu delivered a keynote speech titled "The Rise and Challenges of Cryptocurrency."

Chen Yulu delivered the keynote speech

The theme I want to share today is "The Rise and Challenges of Cryptocurrency." Cryptocurrency is a type of digital currency that operates through computer networks, with the ownership of each unit of cryptocurrency recorded and stored in a digital ledger or blockchain. The blockchain is the underlying technology of cryptocurrency, with its core being consensus mechanisms such as Proof of Work (PoW). Cryptocurrencies mainly include three types: first, payment cryptocurrencies, such as Bitcoin and Ethereum; second, stablecoins, the most famous being the US dollar stablecoins USDT and USDC; third, central bank digital currencies, also known as sovereign digital currencies, with larger-scale representatives such as China's digital yuan. Cryptocurrencies have seven main characteristics: distributed; security; scarcity; anonymity; high volatility in price trading; significant energy consumption during the mining process; and global instant trading without considering currency exchange costs and international transfer time costs.

Since Satoshi Nakamoto (team) mined the first block of Bitcoin (Genesis Block) in January 2009, cryptocurrency has gradually occupied a place in the financial ecosystem from a niche virtual currency experiment. Currently, over 130 countries and regions have begun to include various forms of cryptocurrency in discussions within the mainstream financial system. Against the backdrop of increasing global geopolitical turmoil, high US fiscal deficits, and a sharp rise in US national debt, cryptocurrency assets represented by Bitcoin are receiving widespread attention. Recent developments indicate that the US government is accelerating the construction of a "digital dollar hegemony system" from three aspects: national strategic reserves, cryptocurrency legislation, and cryptocurrency financial infrastructure, attempting to extend its global hegemony in traditional finance into the digital economy era. Against this background, I will focus on elaborating on the global situation of cryptocurrency development and the risks and challenges involved.

The Cryptocurrency Market is Experiencing Breakthrough Progress

In January 2024, the Bitcoin spot trading platform ETF was officially approved for launch, marking a significant event in the integration of crypto assets with traditional financial assets. In December of the same year, the price of Bitcoin surpassed $100,000, driving the total market value of cryptocurrencies from $800 billion to $3.4 trillion in just two years. At the same time, the total market value of crypto assets relative to the liquidity of the six major central banks (G6) has risen from less than 1% in 2009 to 12% by the end of 2024. In the mainstream market, the investment attribute of Bitcoin is shifting from a niche risk asset to a mainstream asset class. The newly elected Trump administration's proposal to establish a strategic Bitcoin reserve plan (SBR) further stimulates and strengthens this transition process.

Figure 1: Global funds began to flood into the cryptocurrency market in the second half of 2023, data source: Coinbase: Crypto Market Outlook 2025.

Since the second half of 2023, the US government's regulatory stance on the cryptocurrency sector has significantly shifted, likely aiming to extend America's traditional financial hegemony into the digital finance sector. In the context of high US government debt and persistent inflation, this strategy can ensure the centralized position of the dollar in the wave of digital financial transformation while also supporting and alleviating its increasingly severe federal debt situation. This strategy may include short, medium, and long-term goals: in the short term, the US government is attempting to build a preliminary framework for global digital currency hegemony through three major means: cryptocurrency strategic reserves, encouraging the expansion of dollar stablecoins, and controlling the core infrastructure of cryptocurrency trading; in the medium term, it will continue to attract (or coerce) leading global crypto enterprises to migrate to the US or come under US government regulation through a relaxed regulatory environment, tax incentives, and long-arm financial sanctions, promoting industrial clustering, employment, and economic growth, while maintaining the US's leading position in blockchain technology research and development; in the long term, the US will ensure that it always holds centralized power in the wave of decentralization in the digital economy by dominating the formulation of global digital financial infrastructure and rules, ensuring that the dollar maintains its centralized position in global investment and trading in the digital economy era.

Figure 2: The scale of cryptocurrency surged and entered the mainstream asset market in the second half of 2023, data source: Coinbase: Crypto Market Outlook 2025.

The Shift in the Stance of the US Political and Business Sectors on Cryptocurrency and Its Strategic Intent

1. Since the second half of 2023, there have been five significant shifts in the US government and industry regarding cryptocurrency.

First, the stance of US financial regulators has shifted from "harsh crackdown" to "guiding regulation." The new chair of the Trump administration, Paul Atkins, is a long-time supporter of cryptocurrency and has actively promoted the compliance path for crypto assets since taking office, reflecting the new US government's positive support for crypto assets and the trend of seeking a new balance between financial innovation and financial investor protection, especially in light of his close relationship with the new Treasury Secretary Scott Bessent. In December 2024, the SEC approved Franklin Templeton's crypto index ETF (EZPZ) for trading on Nasdaq, marking a significant shift in the US financial regulatory stance.

Second, there has been a shift from legislative suppression to legislative support. The US Congress is actively advancing cryptocurrency regulatory legislation with a "dual pillar" approach— the "21st Century Financial Innovation and Technology Act" (FIT21) and the "Guidance and Establishment of the US Stablecoin National Innovation Act" (GENIUS). The FIT21 bill will comprehensively establish the foundational framework for cryptocurrency regulation, addressing various classification and jurisdiction issues, clarifying the regulatory boundaries between the SEC and CFTC (Commodity Futures Trading Commission), setting standards for identifying the attributes of digital assets as commodities or securities, and establishing a legal framework for institutional digital asset custody. GENIUS aims to create a comprehensive regulatory framework for stablecoins, bringing the two major currencies—USDT and USDC, which account for 90% of the global stablecoin market—under regulatory oversight. FIT21 passed the House with bipartisan support in May 2024 and is expected to pass the Senate and be signed into law in 2025. GENIUS is scheduled for a Senate vote in March this year. Once these two bills are passed, the US will form the most comprehensive cryptocurrency regulatory system in the world, significantly influencing the direction of innovation and market structure in the cryptocurrency industry.

Third, there has been a policy shift from a harsh crackdown to strategic assetization. The Trump administration plans to launch a strategic reserve of 1 million Bitcoin, incorporating it into the Treasury's foreign exchange stabilization fund. In January of this year, Trump signed an executive order titled "Strengthening US Leadership in Digital Financial Technology," which primarily includes preparations for establishing a Bitcoin strategic reserve (SBR) and prohibiting the establishment, issuance, or promotion of any form of central bank digital currency within or outside the US, thereby targeting potential competitors to any dollar stablecoin.

Fourth, the industry has shifted from hesitation and observation 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 BlackRock, the world's largest asset management financial group) are also accelerating their holdings of Bitcoin. The total assets of global Bitcoin ETF funds have surpassed 1.1 million BTC, with BlackRock's Bitcoin ETF (IBIT) accounting for 45% (with a market value of approximately $153 billion as of February 2025). The spot Bitcoin ETF attracted over $108 billion in funding in 2024, accelerating the integration of the crypto market with traditional financial markets.

Fifth, there has been an adjustment in tax policy. The IRS allowed taxpayers to flexibly choose accounting methods for crypto assets in its temporary tax relief for 2025, temporarily alleviating the tax burden on CEX users, but in the long term, it may drive crypto investments to concentrate on platforms controllable by US regulatory authorities.

2. The latest developments in various fields of crypto assets indicate that the shift in stance of the US political and business sectors is likely aimed at constructing a "trinity" digital dollar hegemony system.

The three pillars of this system are the Bitcoin strategic reserve (SBR), dollar (pegged) stablecoins, and US-controlled digital financial infrastructure. In this system, the Bitcoin strategic reserve may play the role of gold reserves in the 1944 Bretton Woods Agreement. Bitcoin, as "digital gold," occupies a core value anchor position and will bring five potential strategic advantages to the US.

First, the first-mover advantage. As the most widely recognized cryptocurrency globally, Bitcoin's unique position makes it a safe haven for funds during periods of global geopolitical turmoil and high inflation. The US's early inclusion of Bitcoin, which accounts for over 60% of the entire cryptocurrency market value, into its national strategic reserves provides a first-mover advantage that will attract international capital to continue to converge on dollar-denominated on-chain and off-chain assets.

Second, its role as a new tool for financial stability. During financial crises, Bitcoin's low correlation with traditional assets makes it a second financial stability tool for the US government, aside from traditional dollar quantitative easing, which can assist in supporting the balance sheets of systemic financial institutions in the US during emergencies, thereby protecting the international status of the dollar.

Third, enhancing the competitiveness of the dollar system in the digital age. Stablecoins pegged to the US dollar currently account for 95% of the global stablecoin market, and the trading of crypto assets that are not dollar-pegged but primarily settled in dollars will further consolidate the dollar's position as the central currency in the digital age, helping to extend the dollar's dominance in the global monetary system from traditional finance to digital finance.

Fourth, strengthening the US's voice in the digital finance era. In the future, by dominating the crypto market through strategic reserves and dollar stablecoins, the US will lead the formulation of global crypto asset rules and export and solidify the dual pillar US standards based on GENIUS and FIT21 through international platforms such as the G7, IMF, and BIS, promoting a global crypto asset regulatory framework that aligns with its own interests, thus ensuring its top-level voice in the formulation of international digital asset rules.

Fifth, curbing the development of potential competitors' crypto assets. Through financial sanctions and legislative restrictions on the digital asset development of competitor countries, the US prohibits any institution from establishing, issuing, or promoting CBDCs within its territory. By providing technical assistance, it attracts emerging markets to adopt US-led payment systems, squeezing the internationalization space of competitor digital currencies.

Figure 3: The "trinity" US digital currency hegemony system

3. The EU's policy direction in the cryptocurrency field is unified market regulation and green finance transformation.

This is mainly reflected in three aspects: first, the EU's "Regulatory Framework for Crypto Asset Markets" (MiCA) will come into full effect on December 31, 2024, aiming to establish a clear and unified regulatory framework for crypto assets across the EU. It will categorize all crypto assets into three types and implement differentiated regulation while strengthening compliance requirements for stablecoin issuance and crypto asset exchange operations. This framework aims to manage risks while promoting innovation, ensuring consumer rights and financial stability. Second, the unified regulatory framework lays the foundation for the EU to gain competitive advantage and voice in the global cryptocurrency market. Third, it guides the establishment of a green finance development path for cryptocurrencies, with MiCA imposing high carbon emission taxes on energy-intensive blockchains, promoting the cryptocurrency industry to shift from PoW mechanisms to low-carbon consensus mechanisms like PoS, thereby reshaping the regional landscape of the mining industry.

4. Other global economies face competitive dynamics between stablecoins and sovereign digital currencies.

This is mainly reflected in three aspects. First, the number of economies exploring and promoting CBDCs is steadily increasing. Currently, over 130 countries and regions worldwide 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 vying for digital financial sovereignty and regulatory voice. Second, there is a competitive dynamic between sovereign digital currencies and stablecoins. CBDC models have sovereign advantages, but dollar stablecoins already possess scale advantages. Between 2020 and 2024, the market value of USDT surged by 5.52 times, while USDC increased by 11.35 times, together accounting for 90% of the global stablecoin market value. The settlement volume reached $15.6 trillion in 2024. Third, future digital currencies face risks of regionalization and fragmentation. The US is attempting to strengthen dollar digital financial hegemony through the establishment of SBR reserves, stablecoin legislation, and restrictions on the issuance and circulation of CBDCs. The EU's MiCA framework will objectively limit the development of non-euro stablecoins. Increased competition means that the future global digital financial payment system may face market segmentation and fragmentation risks.

5. Stablecoins are becoming the frontier area for the integration of crypto financial assets and traditional financial assets.

This is mainly reflected in two typical facts. On one hand, stablecoins have enhanced the resilience of off-chain dollar assets. In the 2023-2024 period, the market value of stablecoins rapidly increased and surpassed the growth rate of US M2, strongly supporting the demand for dollars and US Treasury bonds in the context of ongoing high deficits in the US. On the other hand, stablecoins are gradually entering mainstream payment channels. In the first 11 months of 2024, the stablecoin market completed $27.1 trillion in transactions, including a large volume 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.

The New Trends in Cryptocurrency Development Present Risks and Challenges for China

1. An objective view of China's current advantages and disadvantages in the blockchain and cryptocurrency fields.

There are three main advantages: first, the leading layout of the digital yuan and blockchain industry. In the field of central bank digital currencies, the digital yuan is currently the largest CBDC project globally and has received national strategic support. Since its development began in 2014, it has steadily advanced, covering multiple areas such as retail, wholesale payments, and cross-border settlements. Since 2021, the development and practical progress of the cross-border digital currency bridge project (mBridge) have also been globally leading. These foundations make the digital yuan likely to become a financial transaction tool and asset carrier competing with dollar stablecoins in the future. In the blockchain industry, China has incorporated blockchain technology into its national strategy since the early stages of industrial emergence and has clearly proposed the direction of integrating blockchain with the real economy. The market size and growth potential of the industry are significant, with China's blockchain market expected to exceed 100 billion yuan by 2025, having achieved widespread applications in finance, supply chain, government business services, and other fields, with a continuous increase in the number of registered enterprises, reaching 63,300 by the end of 2023.

Second, there are rich application scenarios. The scenarios for digital currency have expanded from the initial areas of retail, transportation, and government affairs to broader fields such as wholesale, catering, entertainment, education, healthcare, social governance, public services, rural revitalization, and green finance. The blockchain industry has numerous mature cases in many areas, including supply chain finance, cross-border trade, and e-government.

Third, there is strict risk prevention and control. China implements strict regulation 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.

China's current disadvantages mainly lie in insufficient international competitiveness in certain fields. First, the influence of technical standards is relatively lagging. Due to differences in regulatory laws, the US currently dominates underlying technologies such as ZKP and Layer 2 scaling, while the EU has also set technical barriers through the MiCA framework, resulting in insufficient voice for China in core protocols and global standard formulation. Second, the development of public chain ecosystems is relatively lagging. China's blockchain industry is primarily based on consortium chains and private chains, and the absence of public chains leads to a gap in innovation capabilities compared to Europe and the US in areas such as decentralized finance (DeFi) and Web 3.0.

2. The US-led cryptocurrency hegemony strategy poses multiple threats to China's financial security.

First, there is capital outflow and exchange rate pressure. The long-term appreciation trend of cryptocurrency assets represented by Bitcoin against the US dollar and other international currencies, along with the rapid expansion of dollar stablecoin trading volume, further strengthens the dollar's dominant position in the global monetary system through the convenience of cross-border payments and value storage functions, undoubtedly squeezing the valuation and internationalization space of the renminbi. Moreover, dollar-dominated crypto channels have become a new path for capital flight. In recent years, the large-scale allocation of Bitcoin by leading US companies and the massive financing wave of on-exchange cryptocurrency ETFs have created a strong "demonstration effect," potentially attracting some domestic capital to flow out through gray channels.

Second, DeFi regulatory arbitrage creates cumulative industrial competitive advantages. The relatively loose regulatory and tax policies in the US attract global DeFi innovation resources, thereby reaping more technological dividends from the entire chain, from underlying standards to application layers. After long-term accumulation, this will form a competitive advantage over China's digital financial infrastructure technology.

Third, there is a competition for underlying technology standards and innovation resources. On one hand, the US currently leads in innovation in areas such as ZKP and Layer 2, while the EU is also integrating regulation through the MiCA framework 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 power to formulate standards in the cryptocurrency industry. On the other hand, China faces pressure from the outflow of blockchain industry innovation resources: the EU's carbon emission policies for the crypto industry and the US's tax incentives for mining operations create a trend for Chinese mining companies and blockchain venture capital firms to shift to Central Asia, the Middle East, and the US, which objectively undermines the innovation capability and computational power security of the domestic blockchain industry.

Fourth, there is a threat from US cryptocurrency hegemony. First, the US is accelerating the gradual incorporation of mainstream cryptocurrency assets into its financial hegemony system. Once this trend is established, it will inevitably squeeze China's strategic development space in the digital finance sector. Second, after the Russia-Ukraine conflict, the US government, in conjunction with the UK, UAE, and other countries, has implemented large-scale long-arm financial sanctions against the Russian government, institutions, and individuals in the cryptocurrency field, seizing a large amount of cryptocurrency 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 confrontational stance between China and the US in the digital currency field.

Of course, cryptocurrency assets represented by Bitcoin are currently showing serious market bubble conditions, and sustained appreciation is difficult to maintain. Once the bubble bursts, it will be a significant blow to the US cryptocurrency hegemony strategy. In this regard, we must maintain a clear understanding and strategic determination, unwaveringly adhere to the value concept of financial services for the real economy, and firmly follow the path of building a strong financial nation with Chinese characteristics.