Stablecoins and Central Bank Digital Currencies (CBDCs): Which Coin is Winning?

March 22, 2023

Stablecoins and Central Bank Digital Currencies (CBDCs): Which Coin is Winning?

March 22, 2023

Key Insights

Stablecoins face significant regulatory scrutiny and slow adoption, with government monitoring and concerns about their potential for illicit activities hindering their growth and market acceptance.
Central Bank Digital Currencies (CBDCs) are gaining traction due to strong government backing, with countries like Indonesia and the UAE actively exploring or implementing CBDCs to enhance financial stability, security, and cross-border payment efficiency.
Despite the competition, stablecoins and CBDCs may coexist, serving different purposes, depending on how effectively they address regulatory concerns, user needs, and integration with existing financial systems.

Primer

There are two coins I am very excited about and can’t ignore any longer – Stablecoins and Central Bank Digital Currencies (CBDCs).

When a new neighbor moves into your block, it’s only natural to feel curious about who they are and ask questions to get to know them better.

But it is always different if a new crypto form hits the markets.

While these coins can be confusing to understand initially, it’s important to recognize that these two digital currencies are fundamentally different. Both coins are designed to be secure and reliable but are very different.

Stablecoins are decentralized and pegged to reference assets such as fiat currency or gold.

CBDCs, on the other hand, are issued by central banks, are monitored by the government, and can be used to buy goods and services.

These coins have enjoyed popularity because of their low transaction fees, faster transaction speed, and improved stability.

Why are Stablecoins and Central Bank Digital Currencies (CBDCs) Collapsing?

Government Targeting

Last year, stablecoins were predicted to take over decentralized finance (DeFi). However, its skyrocketing growth has hit a stumbling block. This is happening because the government has started monitoring stablecoins because of the risks they pose to the users.

For example, PayPal recently announced plans to create its stablecoin but faced regulatory obstacles. Another stablecoin Paxos (the issuer of BinanceUSD and Pax Dollar), is under investigation by the New York Department of Financial Services.

The investigations have scared off potential investors, causing concerns in the market.

Slow Adoption

Another problem is that stablecoins are becoming the least preferred method for people wanting to enter the cryptocurrency market.

Even though governments like Singapore have encouraged digital currencies such as stablecoins, it has yet to attract massive adoption.

However, it remains to be seen whether such a top-down approach will set a positive trajectory for stablecoins.

Heighted Risks and Suspicions

Many people were hopeful that things would improve, but it has jumped from the frying pan into the fire.

The National Australia Bank (NAB) plans to launch stablecoin to promote carbon credit trading and real-world assets (RWA) tokenization. However, it has been scrutinized as a potential by-pass to the SWIFT system.

Besides, Russia and Iran plan to create a gold-backed cryptocurrency to promote their bilateral trade operations. This way, these nations aim to bypass the sanctions imposed by the United States (US) and reduce US Dollar’s (USD) usage in trade.

Sadly, these coins are becoming suspicious due to concerns about their lack of regulation and risks of illicit activities.

Cautious Approach

The adoption of CBDCs has been slower than predicted.

Despite positive results from India’s digital rupee pilot program, the country is cautious and has yet to launch CBDC on a larger scale. Like India, many adopters are playing wait-and-see games, especially after the problems faced by nations like Nigeria and China with digital currencies.

The cautious approach to adopting CBDCs is due to concerns about potential disruptions to financial systems and the need to evaluate the benefits and risks carefully.

Advantages of CBDCs over Stablecoin?

Significant Adoption of Wholesale CBDC

Countries and central banks have already started to use CBDCs, unlike stablecoins, which are still in development.

Notably, the Central Bank of Indonesia has plans to launch a wholesale CBDC to boost its financial market. Its appeal comes from the fact that it will be based on distributed ledger technology, which promises sustainability. It will also enhance tokenization and security payments.

Therefore, CBDCs are gaining preference over stablecoins due to the tremendous support from the government.

CBDC Implementation to Promote Economic Interoperability

Many economies are considering CBDCs to improve their financial stability.

For example, approximately 100 nations and Asian banks plan to use CBDC to improve financial flow. There are also increased experiments, research, and pilot programs into CBDC to resolve challenges such as offline connectivity, functionality, and interoperability. Notably, the World Economic Forum (WEF) has convened the Central Bank Digital Currency Regional Roundtable Series to ensure that CBDCs are interoperable and can streamline the global financial system.

Thus, CBDCs promise to promote global financial integration.

Closing Summary

In conclusion, the competition between stablecoins and central bank digital currencies (CBDCs) is still in its early stages. Stablecoins and CBDCs may coexist, each serving different purposes and user needs. The outcome of this competition will ultimately depend on how well these coins address the concerns of regulators, financial institutions, and users and how they can integrate with the existing financial infrastructure. Only time will tell which coin will come out on top.

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