Since Bitcoin’s inception back in 2009, cryptocurrencies have come quite far, with there being over 320 million crypto users worldwide as of 2022. While Bitcoin is yet to be officially accepted and regulated by any of the major countries in the world, they are seen as a threat to fiat finance by most central banks. To combat the deposition of traditional currencies, many countries, however, have come up with the concept of CBDCs or central bank digital currencies. CBDCs are supposed to be cryptocurrencies controlled by the central banks of various countries. Countries like the UK and India already have plans to test out central bank digital currencies like the Digital Euro and the Digital Rupee respectively.
Central bank digital currencies are often compared to stablecoins- crypto tethered to another fiat/crypto asset that’s value is backed 1:1 by its underlying asset. Examples of top stablecoins include the USDT and the USDC. While stablecoins are inherently ‘more stable’ than cryptos , they are certainly quite different from CBDCs.
The debate regarding CBDC vs. stablecoins has been long-standing. In this post, we discuss the differences between stablecoins and CBDC.
What is Stablecoin?
Stablecoins essentially bring the best of both the crypto and the fiat worlds together. They might be backed by a fiat currency (like the US dollar), another cryptocurrency, or even valuable assets like precious metals, so their prices are much less volatile than normal cryptos. Features of stablecoins include:
- Maximized security and instant processing of payments
- Stable prices, as the volatility factor is numbed due to stablecoins being fiat or crypto reserve-backed
- Liberty to make private payments
The top stablecoins by market cap include Tether (USDT), which is backed by the US dollar. Others making the top stablecoins list are USDC, DAI, and Binance USD.
What is CBDC?
A central bank digital currency is a centralized virtual currency governed by the financial authorities and the broader government of a country. A CBDC is essentially the official fiat currency of a country being represented in the digital format.
As many in the crypto space have put it, a CBDC is a way for governments to tamper down the hype surrounding crypto assets among the general populace. The primary goals of CBDC are to:
- Ensure secure, centralized payments
- Regulate the payment network
- Release reserve-backed digital asset into circulation
- Keep the traditional banking system alive
Stablecoin vs. CBDC: What are the Differences Between Stablecoin and CBDC?
To understand the differences of CBDC vs. stablecoins, let’s put their key features up against each other:
|Regulation||There is no central regulatory authority in charge of stablecoins.||Every country’s central banks are supposed to be in charge of regulating central bank digital currencies.|
|Exchange value||Stablecoins do not have any exchange value with another currency, not even with the fiat currency it is backed by.||Since CBDCs will be issued by governments, they can be converted to fiat currency and have exchange values in general.|
|Decentralization||Stablecoins are decentralized.||Being controlled by the government of a country, central bank digital currencies are centralized.|
|Security||When CBDC vs. stablecoins is considered, the security behind stablecoins is lower compared to central bank digital currencies.||Central bank digital currencies would have much better security features implemented, due to the aforementioned regulation.|
|Taxation||Stablecoins have no set taxation rules attached to them.||CBDCs will definitely come with taxation policies formulated by the issuing countries.|
|Money used in backing||Stablecoins utilize private money to be backed.||Central bank digital currencies will be backed by government issued money.|
When you think about CBDC vs. stablecoins, the primary difference between them is the mode in which the financial systems work. Central bank digital currencies are centralized to the core while stablecoins generally lean towards the philosophy of open source technology and decentralized ecosystems. The lack of a central authority holding power over stablecoins ensures more private and secure transactions, but it can’t be denied that the regulation behind the government-backed digital currencies makes them attractive to laymen who are still largely uninformed about cryptocurrency enabled Web3.
CBDCs are yet to be unveiled for public use in any country, so thus far we can only speculate on which one would prove more beneficial- stablecoins or central bank digital currencies. While we wait for further clarification on the functionalities of CBDCs, only this can be said about the CBDC vs. stablecoins debate: ultimately it falls upon every individual user to compare their features and decide which one suits their unique needs best.
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