Cryptocurrencies have come a long way since their inception. They have quickly evolved from a speculative asset class to a burgeoning investment opportunity. Not to mention their underlying blockchain technology, which has shown plenty of scope for public utility.
What has also changed is the favourability of governments, the openness to regulation and the overall agreement on the advantages of crypto. With these advancements, two unique kinds of cryptos — stablecoins and CBDCs — have emerged and are expected to be widely used in the future.
Tag along as we explain what these digital assets are, their similarities as well as their differences.
What are Stablecoins and CBDCs?
Stablecoins are virtual digital assets whose value is pegged to a real-world fiat currency like the US dollar. Operators of stablecoins usually maintain a reserve of fiat currency equal to the token's circulating supply.
If more stablecoins are minted, an equal amount of fiat must be added to the reserve and vice versa. This is how stablecoins maintain their valuation with the currency they track. Some stablecoins can also be algorithmic, where assets back only a part of their circulation and the other is regulated by an algorithm that creates or destroys coins to keep the peg intact.
On the other hand, Central Bank Digital Currencies (CBDCs) are cryptos backed by a country's central bank, like the RBI in India. Instead of being pegged to a fiat currency, these digital assets are themselves a digital form of the legal tender in the country.
Similarities between stablecoins & CBDCs
The greatest similarity between stablecoins and CBDCs is their underlying blockchain technology. The wide utility of crypto applies to them both as they can (ideally) be stored pseudonymously in crypto wallets and lead to faster transactions. Moreover, these transaction details are stored on a publicly distributed ledger.
The second similarity is regarding volatility. Cryptocurrencies are volatile, but stablecoins and CBDCs, despite being digital assets, are more or less stable. One is pegged to a fiat currency, the other is a form of fiat currency itself. This leaves little to no room for volatility.
The third and last similarity is regulation. Both stablecoins and CBDCs are regulated, by private auditing firms in the case of stablecoins and by central banks in the case of CBDCs. Therefore, the chances of a rug pull are very low.
Differences between Stablecoins & CBDCs
The first significant difference between stablecoins and CBDCs is the governing authority. With the popular stablecoins of the world, the governing authorities are private companies such as Circle and Binance. CBDCs, on the other hand, will be created, controlled and regulated by the central banks of various countries. Every country can develop a CBDC of its fiat currency and manage it just like physical money.
The second difference is that stablecoins are backed by an equal amount of fiat currency. You can always exchange a stablecoin for an actual dollar which is stored in the reserves. CBDCs don't have any assets backing them, only the good old promise of the country’s central bank, it is how all fiat currencies work.
Stablecoins can come under the blanket of cryptos. This means that they can be banned and taxed as digital assets. This is not the case with CBDCs, as the country itself issues the currency.
Stablecoins have become a standard for international transactions and investments. However, CBDCs will only be as powerful as the fiat currency of that particular country. If a government or organisation doesn't accept INR for trade, they will not accept the INR-based CBDC, if and when it comes out.
Stablecoins are cleverly pegged to only the popular currencies like the US Dollar and undergo strict auditing to preserve international trust.
Conclusion
Central bank digital currencies have the potential to completely transform economies by making transactions smoother, bringing in greater transparency and inclusivity. However, they are not a replacement for stablecoins, which have their own set of uses that CBDCs cannot just yet fathom.
