Stablecoins or CBDC – Who will become the mainstream?

What is money to you? The cash in your wallet? The balance in your bank account? The credit limit on your card?

For most of our lifetimes, money has been fiat currency which is backed by governments and the value they attach to it. Then came Bitcoin, Ether, Dodgecoin and many more such ‘cryptocurrencies’. While boom and bust cycles in cryptocurrencies, which have been around for over a decade now, have come and gone, the pandemic brought on another bout of belief in these units.

Stablecoins are very often used as a store of value for cryptocurrency investors to enable easier on ramp into buying cryptocurrencies when needed, especially on a short notice. A stablecoin is a class of cryptocurrencies which are backed by a reserve asset and are pegged to a certain external reference in an attempt to offer price stability in the highly volatile cryptocurrency markets. (Read the article : What are Stablecoin and why do they matter? & Understanding the four types of stablecoin)

Central bank digital currencies (CBDCs) are presently one of the most revolutionary interventions in the global financial ecosystem. CBDCs have been gaining the attention of the financial services industry as well as the media in large numbers. The People’s Bank of China announced the imminent replacement of cash being circulated presently with new digital currency. Similarly, there are many propositions of The European Central Bank for integrating CBDC into their financial ecosystem. (Read the article : What you need to know about CBDC)

Stablecoins or CBDCs, no matter which one of them gets mainstream adoption first, it is highly essential that the merchants and vendors are prepared when consumers make this transition.

It is really inevitable now, especially with the lessons that the ongoing global pandemic has taught the world about unnecessary touch points in the financial transactions both sides of a product goes through.

During this pandemic, globally all countries have seen a reduction in consumer dependence on cash. There are new technology innovations launching every day that attempt to bridge the gap with merchants and consumers seamlessly with the least number of touch points.

Payments in the future would reduce the dependency that economies have at present. Cash also proliferates evils in society like corruption, terrorist financing and money laundering amongst others.

Understanding this, it is soon becoming a consensus that digital payments would be based on CBDCs and Stablecoins rather than speculative assets like Bitcoin, Ethereum and other cryptocurrencies.

There are even private companies like JP Morgan, Amazon, Facebook and Wells Fargo building their own stablecoins with the objective of keeping their currency’s value as stable as the dollar is.

One facet of the stablecoin is that, at a very fundamental level, stablecoins did in fact help lead to the development of CBDCs. For example, the original Libra Association white paper and several of the CBDC projects that have been implemented appear to have quite a few similarities from an operational perspective. Even more importantly, the entire idea of a stablecoin made the idea of centrally issued crypto assets tangible and realistic in the marketplace.

To keep developing, and evolving into easy-to-use options, it makes sense that stablecoins will continue to play an important role in the further development of CBDCs.

Something that can easily be overlooked in the fast moving and rapidly changing crypto asset is that while cryptocurrencies (including stablecoins) are still dealing with regulatory ambiguity, CBDCs do not have to contend with these issues. Since, by default, a CBDC is issued and managed by a government or governmental agency it makes sense that it will be treated as an equivalent to existing fiat currency.

That certainly will help address and resolve, potentially, many of the accounting and reporting issues that exist for other cryptocurrencies, but also creates an opportunity for private sector actors. Specifically, it would be illogical to assume that governmental actors or agencies will be able to develop, implement, and maintain a CBDC network without private sector partners.

In other words, by collaborating with governmental actors, private issuers of stablecoins will be able to improve existing offers as well as develop new ones.

Regardless of the sector being examined, the importance of competition and competitive forces are difficult to overstate. Especially in an area that is as fast moving and rapidly developing as blockchain and crypto assets, there are invariably going to be bumps in the road, and that is exactly why having both privately issued stablecoins and CBDCs is so important. No single issuer – private sector or governmental sector – will have a monopoly on answers or good ideas, and to arrive at the best possible iteration will require input from all participants.

Framed in that context, there is the potential for a virtuous cycle to be established in which private sector innovations and developments linked to stablecoins create better and more market oriented CBDCs.

There is no way to accurately predict just how the crypto asset space will continue to develop and evolve, especially once politics and macroeconomic factors become integrated into the conversation. That said, and taking into account that market participants are going to want the best product possible, it does seem to make sense that there will be some sort of private-public-partnership that drives the wider ecosystem forward.

Cryptoassets are evolving quickly, with stablecoins and CBDCs leading the conversation as 2020 turns into 2021. To most effectively capture the benefits of these developments, however, all participants will need to participate in the conversation. This requirement, and expectation, will continue to drive the further development, expansion, and refinement of the crypto asset going forward.