Recent comments and discussions about the roles, opportunities and challenges associated with stablecoins have made headlines in both United States of america and other markets. As part of the response to these discussions, more than 100 countries around the world have become increasingly interested in developing State Backed Crypto Assets, commonly known as a central bank digital currency (CBDC).
Putting aside the very strong views and positions put forth by the supporters of CBDCs, there are many pros and cons that can be said on an objective basis. The pros and positives associated with this idea include 1) the backing and legitimacy of a nation-state behind a cryptoasset, 2) the low price volatility that should result from this institutional backing, and 3) finally – the increased appetite of individuals. And Desire and Entrepreneurs actually use crypto as a medium of exchange.
Of course, there are going to be negatives for every positive or potentially positive, many of which have been pointed out on a recurring basis by proponents of decentralized crypto options. First, the idea of a centrally managed and governed cryptoasset is a curse for many of crypto’s most engaged users. Secondly, the history of central government interference with controls on currencies, especially the effect on purchasing power, does not bode well for the implications of government-managed crypto. Lastly, there is a possibility that all transactions carried out by users of a CBDC can be traced to a traceable and immutable record, i.e. the creation of a centrally controlled monitoring tool.
Given these significant positives and negatives, there is clearly room for innovation and creativity in the further development of these cryptocurrencies; Stablecoins can play an important role in this process. Let’s take a look at what is – and should be – an important role for stablecoins in the further development of CBDCs.
Money competition is nothing new. As strange or strange as it may sound in the present age, history or money and currencies are more complex than they seem. Direct government control over a nation’s currency, and governments’ monopoly on the currencies used in a certain jurisdiction, have not been the norm in most circumstances. Even in the United States, which (relatively colloquially) has a short track record of self-directed monetary policy, there is a long track record of competing currencies and funding sources.
Stablecoins coined in this context do not represent anything particularly new or innovative, but are simply a revision of how money and currencies have traditionally evolved. In other words, stablecoins can be thought of as both making a return to the past while opening the door to the future of money.
Competition improves results. Competition, in all its forms, always leads to better results, better products and services, and this has been demonstrated in the stablecoin space since 2020. Whether this takes the form of better user interfaces, better transparency in how stablecoins work, or better enabling individuals and institutions to use these cryptocurrencies, the trend is clear. Competing forces, products and third-party solution providers have – and continue to be – resulting in better products and services for end users.
Why should a CBDC operate differently? Particularly as it deals with technology-based products and solutions, it has a track record of how public-private partnerships can collaborate to develop better solutions. Lessons learned from stablecoin projects and other private sector initiatives have been and should continue to be applied to public sector ideas and projects.
Consistent transparency standards, Much has been written and discussed about the importance for investors and regulators alike to understand which assets are underperforming certain stablecoins. As a result of USDT having by far the largest market capitalization of any single stablecoin, Tether may receive the most coverage, but the issue extends far beyond any single coin. In order to gain interest and desire to actually use stablecoins for trading purposes, there is an expectation that everyone involved in those transactions will understand how these transactions are being backed.
Given the wide-ranging efforts in many countries to develop CBDCs, along with many options for mitigating these cryptocurrencies, it is understandable that interest in transparency for these instruments would also exist. Trust but verify is an old adage, and applies as much to CBDCs as it does to other government and political issues.
Lessons learned and taught from privately issued stablecoins can and should be applied to the further development of CBDCs. The sheer amount of work and projects is remarkable, especially since the idea of governments tolerating – very few issuances – cryptocurrencies in just a few years was the best idea. CBDCs will eventually come into significant force in the market, but this does not mean that the fortunes and fortunes of private stablecoins are obsolete. Instead, the legacy of stablecoins could be both a proliferation of private and competing currencies and improvements to CBDC projects that ultimately succeed.