Central Bank Digital Currency (CBDC) is the government’s Stablecoin. On the other hand, Tether, Dai among other traditional Stablecoins are community-based coins. Therefore, they are the same coin of different sides.
They are currently one of the most talked-about topics, both in the Cryptocurrency space and Open finance. It is, therefore, a statement of fact that “CBDC and Stablecoin are the new face of Fintech and Open finance.” Consequently, it is imperative to have a comparative understanding of the duo: Stablecoin and CBDC.
Concurrently, this article will advise you on what you need to know about CBDC and Stablecoin. You will also know the possible risks and opportunities associated with both. That said, read on!
“Stablecoin was designed as a sure way of reducing Cryptocurrency volatility risk.” It is a set of cryptographic tokens or digital assets pegged to a basket of currencies. Since the launch of Tether, which is pegged to the Dollar, in October 2014, Stablecoin has expanded to other national currencies. For instance, Euro pegged, Yen pegged, Franc pegged, etc. That said, Stablecoins are of various denominations outside national currencies. Consequently, that brings us to various types of Stablecoin: Fiat-backed Stablecoin, Crypto-backed Stablecoin, and Algorithmic Stablecoin.
However, Stablecoin remained in the hands of private providers until Facebook announced the Libra project. In affirmation, Michael J Cassey, the Chairman of Coindesk advisory board and a senior advisor for Blockchain research at MIT’s Digital Currency Initiative said:
“Facebook’s Libra project, in which a group of companies managing a basket of fiat currencies will maintain a digital token at a stable, redeemable value has taken the idea of “Stablecoins” out of the crypto echo chamber and thrust it into the public arena.”
Meanwhile, the announcement of Libra, widely debated even at congress level, attracted the state. Hence, research for state-owned Stablecoins became popular. And are nicknamed “Central Bank Digital Currency.” According to a previous article, CBDC is a digital form of fiat money and a Cryptocurrency backed by the state. By implication, it is a state-backed Stablecoin.
CBDC and Stablecoin: A Means to An End.
While there are accompanying risks and opportunities associated with the duo, here are some interesting insights to consider:
According to Tobias Adrian et al. in an article titled: From Stablecoins to Central Bank Digital Currencies, Stablecoin and CBDCs solve smart contract problems in Blockchain projects. They recalled that Blockchain designers had two choices of payment mechanism: On-chain and Off-chain. Unarguably, the invention of Stablecoin and CBDCs enabled a proven monetary unit, such as Dollar to have programmable, smart contract qualities of its own that proffer solutions to significant new efficiencies in commerce. Furthermore, they believe that providing Stablecoin providers access to central bank reserves will revolutionize finance. Hence, the need for a blueprint they called “Synthetic Central Bank Digital Currencies,” sCBDC, for short.
You now see that Stablecoin and CBDC have shared characteristics, risks, and opportunities. Nonetheless, one is in the hand of the state, while the other is in private or public corporations. Consequently, they could have liquidity issues, negative impact on credit creation, a single point of failure, among other risks as highlighted by Sir. John Cunliffe, Deputy Governor of the Bank of England, in a speech at the London School of Economics, London.
Conclusively, all pointers show that CBDC is an extended Stablecoin, which is an instrument of the state to regain monetary policy control and governance. On the other hand, the Stablecoin is giving a boost to be backed by the government and as such, helps minimize risks in Cryptocurrency adoption.
Okereke has a passion for researching blockchain and cryptocurrency. He enjoys creating long form educational content to inform others on the opportunities in this space.