In the last few years, cryptocurrencies such as Bitcoin and Ethereum have become a solid part of the monetary landscape, growing from digital money used only in shady businesses to trillion-dollar technologies.
Financial regulators and central banks have started to investigate the broader potential of digital currency more extensively. More than 80 countries like New Zealand, the UK, Hong Kong, the EU, and the US are exploring the possibility of creating a central bank-issued digital currency.
As the future of money is becoming increasingly digital, what type of changes to expect for businesses, consumers and commercial banks?
What is a CBDC?
Central bank digital currencies (CBDCs) are essentially an electronic form of fiat currencies (dollars, pounds, euro, yen).
Some could say this is the same as today, because a large number of payments nowadays are already digital, whether via bank transfer or card payments. However, there are several differences.
First, when you transfer money from a bank account to another, it would pass through multiple banks and may take days, while with CBDC, could happen instantaneously on a digital ledger.
But the main difference is the control…
Nowadays, fiat money can be created by a commercial bank giving out a loan with a fractional reserve system. On the other hand, CBDC would centralize control by the central bank which would directly issue the digital money, taking an enormous amount of power, data, and risk within a single bank.
Main Differences Between Stablecoin and CBDC
CBDC is not to be confused with Bitcoin or cryptocurrencies. Even if the idea of CBDC comes from cryptocurrencies, they are very different entities. Also, they should not be confused with stable coins.
One of the main limits of cryptocurrencies has been price volatility which makes it difficult to be used in daily payments. That’s one of the reasons stable coins were introduced: overcoming this instability by maintaining a stable value in relation to an official currency. For example, USDT (Tether), is designed to be pegged to the US dollar and is still the largest Stable coin.
This has been proven useful for trading purposes or for sending money overseas, instead of using obsolete methods such as westernUnion.
Stable coins are making central banks worried about losing control, also with the increasing use of Decentralized finance. And here comes the answer of CBDC.
How are stablecoins and CBDC different?
Centralization vs Competition
The key differences are centralization and privacy. The first (stablecoins) are privately issued and offer (relative) competition among issuers while CBDC are centralized and allow control from central banks. Sending money with an ETH, LUNA, SOL wallet address can keep some anonymity (or better, pseudonymity), while CBDC would have a record of all users and transactions.
Also, talking about the technical aspect, tokens and cryptocurrencies are running on a blockchain, while CBDC do not necessarily run on a blockchain but more likely on other centralized databases (or DLT, which are the same thing)
Stable coins are backed in different ways. There are several models now launched on the market. Some are backed by other cryptocurrencies, others by commodities or fiat.
On the other hand, you can be sure that CBDC is 100% backed by fiat money.
Some Bankers are Concerned
Some experts say issuing a CBDC could put commercial banks’ role at risk. CBDCs could reduce the demand for commercial bank accounts and cut banks out of the business of verifying transactions
Moreover, banks are still going to be very important in terms of creating money, because after all, when a bank makes a loan, it creates a corresponding deposit. So commercial banks are responsible for creating most money in modern economies, but certainly, there is the concern that if CBDC accounts do catch on, they would endanger the business of commercial banks. And that is a significant worry, as commercial banks remain quite important in terms of creating credit and creating money in an economy.
Again, If people will interact directly with the central banks, this could totally change the landscape, placing all the power and control in the hands of a Central Bank. This is one of the very reasons why CBDC are still cautiously approached till now . It could take years and years before this takes place but it’s useful to look at the future already since the Digital Yuan in China is already under testing on a local level and the idea is catching on in several jurisdictions.
We believe that competition is the fuel of innovation and growth since the best alternative can only be found by a decision of the market.
It’s quite clear that the economy is demanding more decentralization. So we welcome a future where, instead of increasing the centralization, the fiat money will find a consistent space on the decentralized, public ledger.
Stable coins could be the way!