Central bank digital currencies (CBDC) and so-called “stable coins” or stablecoins occupy an important place among the key fintech trends of recent years. Both innovations aim to revolutionize the payment method, but they have different characteristics. Read more about this below.
CBDC: A digital version of cash from a central bank
CBDC, or central bank digital currency, is a digital version of cash that is issued and controlled by a country’s central bank. With 94% of the world’s central banks at one stage or another working on their own CBDCs, sovereign digital currencies are a hot topic in the world of finance.
Key motivations for CBDC development were:
- Financial accessibility: CBDCs can potentially reach unbanked populations.
- Combating the decline of cash: As the use of cash declines, the central bank aims to offer an alternative for digital transactions that it will control.
- Opposition to private digital currencies: The rise in popularity of various cryptocurrencies has prompted central banks to explore CBDCs to maintain control over their national currency.
There are retail and wholesale CBDCs. Retail CBDCs are available to the general public for daily financial transactions, while wholesale CBDCs are used for interbank settlements between financial institutions.
Stablecoins: cryptocurrencies with stability
Unlike traditional cryptocurrencies, known for their volatility, stablecoins seek to maintain a stable value tied to the underlying asset. This asset can be a fiat currency (for example, USDT is pegged to the US dollar), gold. There are also algorithmic stablecoins that rely on smart contracts to maintain a price peg.
That is, stablecoins appeared as a response to the instability of traditional cryptocurrencies. Users can now use them for digital transactions without the risk of price fluctuations.
CBDC vs. stablecoins: a comparative analysis
The emergence of CBDCs and stablecoins could change the future of payments. Both innovations are already affecting traditional settlement systems, although their approaches differ significantly. Let’s consider the key aspects.
CBDC: Central banks have full control over the issuance, distribution and monetary policy of CBDCs.
Stablecoins: control rests with private companies or foundations.
CBDC: Given the trust in the central bank as the issuer, CBDCs are likely to be secure and use advanced security protocols.
Stablecoins: the security of stablecoin settlements depends on the issuer and the underlying asset backing the stablecoin. Algorithmic stablecoins have additional layers of security.
- Innovativeness
CBDC: innovation may be slower due to central bank oversight and potential risks. However, CBDCs can be integrated with existing financial infrastructure for wider adoption.
Stablecoins: innovation is a key factor. New stablecoin designs and features can emerge quickly, but they can also face regulatory hurdles.
- Privacy
CBDC: transactions can be tracked, raising privacy concerns among users.
Stablecoins: the level of privacy depends on the regulation of stablecoins. Some of them offer anonymity, while others require user identification.
- Offline payments
CBDC: can work even without an Internet connection, which is very important for regions with limited network access.
Stablecoins: by their very nature, stablecoins usually require an internet connection to transact.
The future of payments
CBDCs will most likely co-exist with stablecoins, and each of these innovations will serve different needs and provide benefits. CBDCs can be used for secure, government-backed transactions, while stablecoins can offer faster and more innovative solutions for micropayments, cross-border transfers, and more.
Both CBDCs and stablecoins can change the field of payments in the following areas:
- faster and cheaper transactions: CBDCs and stablecoins promise near-instant payments with significantly lower transaction costs, making them ideal for both domestic and international payments;
- extended financial availability: a large part of the world’s population is not covered by banking services. CBDCs and stablecoins, due to their availability and potential for offline functionality (in the case of CBDCs), can expand financial access;
- simplified cross-border payments: the current system of cross-border payments is complex and slow. CBDCs and stablecoins, with the potential for interoperability between different countries, could greatly streamline the process, stimulating international trade and global economic activity.
CBDC and stablecoins are still in their early stages. CBDCs are undergoing pilot programs in various countries, while stablecoins struggle with ever-changing regulatory hurdles. However, the potential of these innovative financial instruments to change the payments sector is clear. So companies that aspire to be leaders and maintain financial stability should closely monitor the development of both CBDC and stablecoins.
