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 a 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 assets into circulation
- Keep the traditional banking system alive
👀Curious to know more about CBDC? Read our in-depth guide on What is Central Bank Digital Currency?
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.
Frequently Asked Questions (FAQs)
1. Is CBDC Better than Cryptocurrency?
There is no simple answer to the question of whether central bank digital currencies (CBDCs) are better than crypto. Both have their own advantages and disadvantages, and ultimately, it will depend on each individual’s needs and preferences as to which is the better option.
CBDCs usually have the backing of the government and central banks and are, therefore, more stable and less volatile than crypto. They are also more regulated and, thus, more protected against fraud and manipulation. On the downside, CBDCs are less anonymous than crypto and may be subject to more government control.
On the other hand, crypto is decentralized and not subject to government control. They are also more anonymous and thus offer more privacy for users. However, crypto is more volatile and less stable than CBDCs and could be more susceptible to fraud.
2. Will CBDC Replace Cryptocurrency?
There are a few schools of thought on this matter. Some believe that CBDCs will pave the way for the mass adoption of crypto, as they will increase public trust in digital currencies. Others believe that CBDCs will actually end up replacing cryptos altogether.
It is difficult to predict exactly, but it seems unlikely that CBDCs will replace crypto entirely. Crypto has a number of advantages over CBDCs, including its decentralization, anonymity, and immutability. However, CBDCs could potentially eat into the market share of crypto, as they are likely to be more stable and backed by governments.
Only time will reveal the exact scenario of the future. In the meantime, crypto and CBDCs could continue to witness growth in popularity in tandem with each other.
3. Can CBDCs and Stablecoins Coexist?
The answer is complex, as there are several factors to consider. On the one hand, CBDCs could benefit from the stability of stablecoins. On the other hand, there could be certain risks of CBDCs destabilizing the financial system if they are not properly managed.
At the moment, it is still too early to say definitively whether CBDCs and stablecoins can coexist. However, it is clear that there are both risks and opportunities which exist in the development of these digital currencies. Some CBDCs could also be developed as a counter option for private stablecoins or vice versa. The stablecoin vs. CBDC debate could continue for some more years until some clarity is observed.
4. Are Central Bank Digital Currencies Stablecoins?
CBDCs and stablecoins are not the same. A central bank digital currency (CBDC) is a digitized form of national currency issued by a country’s central bank. A stablecoin is a digital asset pegged to the value of a real asset or another cryptocurrency.
CBDCs are issued by central banks and backed fully by the issuing government. This makes them legal tender, just like traditional fiat currencies.
Stablecoins, on the other hand, are digital currencies that are not backed by a central government. Instead, they are typically backed by a reserve of assets, such as gold or fiat currency.
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