The future of cash: Stablecoins vs. CBDC

Will the usual procedure of payments undergo change in the near future, and is there a difference between CBDC and stablecoins?
11 NOVEMBER, 2021
Even though cryptocurrency has many applications and decentralized finance transforms the traditional financing system overall, the crypto industry takes its origin from the idea of changing the transactional sector and the way the store of value is defined. To put it simply, the primary means of using crypto are payments and short-term stores of value. Both of the mentioned are crucial for massive crypto adoption: after all, these two operations are most frequently conducted by regular consumers. An average person performs tens of transactions daily. Our long-term investments may be put in crypto- or other assets; on a more everyday level, though, all of us deal with short-term liquidity, which is money used for day-to-day expenses (cash).

Since everyday payments are an enormously big and significant part of the financial agenda, it may become the next game for crypto adoption. Still, there is a major obstacle standing in the way of this adoption: volatility. While Bitcoin's volatility is not problematic for long-term holders (because it grows over time), it's still highly troubling to use in day-to-day transactions as it can quickly lose half of its price in a day. The same goes for other cryptocurrencies, and this is why they can't become a full-strength substitute for fiat and cash. However, there are two cryptocurrency instruments that potentially can solve this problem: stablecoins and CBDC (Central Bank Digital Currency).

CBDC vs. Stablecoins: notion

Stablecoins are cryptocurrencies pledged 1:1 to a given fiat currency. There are different ways stablecoins are implemented: for example, it’s possible to hold 100% of collateral β€” that is, to accept 1 million in a particular currency and issue the same amount of stablecoins. There also are more creative ways how stablecoins are collateralized: some of them are backed by financial instruments, and some are supported by overcollateralized algorithmically managed cryptocurrency portfolios. The latest means that if, for example, there's one million currency in stablecoins, there's two million in crypto.

There are a number of ways stablecoins can be issued as well as different types of issuers. The market competition is substantial.

CBDCs (Central Bank Digital Currencies) are currencies issued by central banks. It is an analog of fiat which is using blockchain technology. Often, CBDCs are based on their own blockchains and have their own framework.

CBDC vs. Stablecoins: comparison

Let's look at stablecoins vs. CBDC differences in a closer comparison.

Safety. For obvious reasons, comparing CBDCs and stablecoins will result in favor of the first: this type of digital currency is issued by central banks, which are the governmental authority. This primarily refers to CBDCs issued by central banks of countries with relatively stable currencies. Stablecoins are guaranteed by private organizations, and due to that, there may be occasional problems. For instance, if we're talking about an algorithmic stablecoin collateralized with cryptocurrency, there is a high risk it will eventually fall below its original value. Or, in the case of more recognizable stablecoins such as USDT, the collateralization may be incomplete, which leaves it more exposed to any possible risk. Just as such stablecoin may turn out to be fraudulent, the issuers might easily get sued for other reasons as well. On the other hand, if the CBDC is issued by a bank whose currency is less reliable, the digital currency may be accordingly risky and volatile compared to stablecoins backed by more solid fiat currencies.
Governmental control. One of the major issues with CBDC is that it incentivizes extensive governmental control over all the transactions conducted with it. Alternatively, stablecoins are issued by private organizations, which means that they will be more independent in their performance and more respectful to privacy. Even if the surveillance has to be conducted, it's more challenging to accomplish that rather than it is with CBDC, when the government has complete control over all the transactions. Even though transparency and openness to enforcement are beneficial, it's just as vital to keep checks and balances. The issue we are addressing with this statement is that any given government can't be good or bad; it is merely run by people who might have their personal incentives. From time to time, the winning decision is made in favor of liberal values or in favor of security, control, and enforcement incentivization. Apart from that, the government can be vulnerable to private corporations' lobbying, especially those specializing in payments like Visa and Mastercard, as they may be pushing their own agenda. For example, the big businesses will find it profitable to charge big commissions in a given CBDC framework. This way, they will be able to afford lower margins for more expensive products compared to smaller and cheaper businesses. In conclusion, the factor of governmental control suggests some level of manipulation, while potentially a number of private stablecoin issuers would alternatively create a competitive and developing field.

CBDC vs. Stablecoins: anticipations

The further development of the given technologies would probably be the best if stablecoins and CBDCs came hand in hand. However, in practice, it is noticeable that stablecoins meet some obstacles in their development, while the CBDC usage is constantly being enforced. As for today, many countries' authorities state that cryptocurrencies can't be legal tender, meaning they cannot be legal payment methods: those can be only governmentally issued currencies, including CBDC. Because of this, it won't be easy to reach global stablecoins adoption, and the mainstream users who will learn to interact with crypto will accordingly be able to use this skill in other crypto applications. This factor gives a hint that CBDCs are likely to displace stablecoins.

One more factor worth noting is that governments also tend to regulate stablecoins in a rigorous way. Some usual requirements include registering them as securities or obtaining a bank license, any of which actually only makes stablecoin issuance more difficult and vulnerable to different lawsuits. Due to this, the government will likely be using its power to pressure the stablecoins issuers so that CBDCs will be more widespread.
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Consequences for banks

Today, the banks work as an intermediary between Central Banks and citizens (consumers) in terms of interacting with fiat currency. Holding the CBDC can be implemented in different models, one of which β€” actually holding the digital coin β€” will be equivalent to opening an account at the Central Bank. Accordingly, such an approach triggers a direct competition between the private banks and a Central Bank, creating an incentive for the former to innovate and provide better service. To some extent, it's actually good: after all, competition on the market provides better products consumers eventually get.

The way people deal with their everyday transactions will definitely set a course for crypto in the nearest future. We are persuaded that the figures at the helm of the entire process of developing CBDC and stablecoins will define how liberal and efficient the entire adoption will eventually turn out to be, no matter how stablecoins vs. CBDC competition will be resolved.
11 NOVEMBER, 2021
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