In 2023, significant strides were made in the realm of digital currencies, particularly with pilot programs demonstrating the issuance and adoption of Central Bank Digital Currencies (CBDCs), such as the eHKD. Prominent financial hubs in Asia, Singapore, and Hong Kong, have underscored their commitment to the regulatory oversight of stablecoins.
As we move into 2024 and beyond, the pace of digital currency transformation is expected to accelerate. It’s crucial for us to grasp the nuances of these digital currencies and the distinct roles they play within the financial ecosystem.
1. Governance
Liability
As a central bank liability, CBDCs are backed by the state, similar to traditional fiat currency, which could enhance trust and stability.
Stablecoins are not liabilities of a central bank; their value is tied to their backing assets, which can include fiat currencies, commodities, or algorithms.
Legal Status
CBDCs are mainly in pilot stages and not yet widely implemented across countries, with legal frameworks under development as central banks evaluate their potential.
Stablecoins are actively used and traded, with increasing legal clarity and regulatory frameworks being established to address concerns like depegging and reserve transparency.
Regulation & Issuance
CBDCs are exclusively issued by central banks, which centralize the governance process and maintain full control over monetary policy and currency distribution.
Stablecoins can be issued by a variety of regulated or unregulated entities, including private companies, and governance may be decentralized, shared among various stakeholders.
Geographic Adoption
CBDCs are generally designed for use within a specific country, with some having capabilities for international transactions, but focus remains on domestic applications.
Stablecoins are designed for global use, enabling seamless cross-border transactions and providing a digital currency option for international trade and remittances.
2. Technologies
Blockchain Type
CBDCs utilize private blockchains controlled by central banks, with access limited to authorized entities to ensure security and compliance.
Stablecoins operate on public blockchains that anyone can join or transact on, promoting inclusivity and wider accessibility.
Technology Infrastructure
CBDCs are more likely to use permissioned ledger technologies that are proprietary, allowing central banks to maintain strict control over the infrastructure and operations.
Stablecoins are built on various open-source technologies that promote innovation and interoperability, with no single entity controlling the infrastructure.
Storage
CBDCs would require wallets that are regulated by the central bank or government, potentially limiting the options for storage and management.
Stablecoins can be stored in a multitude of digital wallets, offering users flexibility in terms of how and where they manage their digital assets.
3. Trustworthiness
Value Stabilization
CBDCs’ value is inherently stable as they represent the nation’s currency and are subject to the same monetary policy as physical cash.
Stablecoins aim at maintaining stability by being pegged to other fiat currencies or stable assets, but the effectiveness of this peg can vary, especially whether and how they are regulated, introducing potential volatility.
Safety of Digital Money
CBDCs are viewed as safer due to central bank backing, offering a digital equivalent to cash with a high level of financial security.
Stablecoins’ safety depends on the issuer’s credibility, regulatory status, and the robustness of the underlying assets or algorithms used to maintain price stability.
Role in Financial System
CBDCs are intended to complement or replace physical cash, directly impacting monetary policy and financial stability.
Stablecoins act as a bridge between traditional finance and cryptocurrency markets, often used to mitigate the volatility common in other digital currencies.
References
- Hong Kong Monetary Authority – Eddie Yue on Stablecoins – Regulating issuers to accord protection to users
- Hong Kong Monetary Authority – Central Bank Digital Currency (CBDC)
- MAS Finalises Stablecoin Regulatory Framework
- How are CBDCs different from cryptocurrencies and stablecoin?
- CBDC vs. Stablecoin – What’s the Difference? | Shardeum
- South Korea to test ‘digital won’ with 100,000 citizens next year
- India’s Retail Central Bank Digital Currency Project Makes Headway
- Reserve Bank and Digital Finance CRC Complete CBDC Research Project | Media Releases
Stablecoins and CBDCs: A Summary of Key Differences was originally published in The Dark Side on Medium, where people are continuing the conversation by highlighting and responding to this story.