How CBDCs & Stablecoins Can Coexist in the Crypto World

Filip Dimkovski
By Filip Dimkovski
Romi Hector
Edited by Romi Hector

Published December 14, 2022.

Title CBDC Central Bank Digital Currency on a board with graphs

The world of cryptocurrencies has expanded beyond just having volatile digital assets like Bitcoin, Ethereum, or Litecoin. The introduction of stablecoins (i.e., assets that are pegged to a real-world asset) has driven a lot of traction to the space, making it easier for users to send and receive money without worrying about the underlying volatility of traditional cryptocurrencies.

However, with the introduction of stablecoins, CBDCs also got introduced. Known as central bank digital currencies, CBDCs are digital tokens that are in many ways similar to stablecoins, but unlike them, they are issued by central banks instead of decentralized autonomous organizations (DAOs).

Although they're built on a similar idea, they offer slightly different features and functions. Nevertheless, the question of whether one might replace the other always persists. So, can these two types of assets coexist in our future financial world? Let's find out.

» Thinking about getting into stablecoins? They can be a great way to make money.

Key Considerations

  • Stablecoins are cryptocurrencies pegged to real-world assets, like USDT and USDC are pegged to the US Dollar. They are issued by decentralized autonomous organizations (DAOs), and they are mostly community-driven.
  • CBDCs, or central bank digital currencies, also exist only digitally, but they are issued by centralized banks and regulated by government authorities. As of early 2023, they are being explored and developed by many governments worldwide.
  • Many financial experts believe in the future of both stablecoins and CBDCs, but their future impact on the financial system is not yet known.

3 Main Differences Between Stablecoins & CBDCs

Although CBDCs and stablecoins are both forms of digital money that represent another asset, there are three significant differences between them.

1. Security

Stablecoins and CBDCs have different levels of security. Usually, stablecoins are thought of as much more secure since they guarantee total anonymity and privacy. On the other hand, CBDCs are more centralized and regulated by governments, which means that the users' personal details may be exposed.

2. Scalability

When it comes to scalability, both asset classes offer different advantages. Stablecoins have an advantage in terms of speed, as they can be transferred between wallets almost instantly. On the other hand, CBDCs have the advantage of being backed by governments, potentially making them more reliable and trustworthy.

3. Governance

As previously mentioned, the governance of stablecoins and CBDCs is quite different. Stablecoins are decentralized and issued by DAOs, while CBDCs are centralized and regulated by governments. This means that CBDC users will benefit from the support of government regulations, but their privacy may not be as protected as it would be with stablecoins.

It's also worth mentioning that, as an asset class, CBDCs always represent the country's fiat currency. The Bahamas and Sweden are among the first countries to develop and implement CBDCs, with the Bahamian "Sand Dollar" and the Swedish e-Krona. Stablecoins, on the other hand, can represent both fiat cash and other assets—as is the case with PAX Gold and KAG Silver Token, which are digital assets pegged to precious metals.

» If you're not sure which stablecoin to invest in, the most popular stablecoins are a good place to start.

Understanding the Relationship Between Stablecoins & CBDCs

It's clear that CBDCs and stablecoins are two different types of assets with distinct qualities. But how do they interact with one another in the financial world?

Well, it's difficult to explicitly describe their current relationship in the financial world, primarily because they're both in the early stages of development. So, we can break down their current interaction and future by answering three key questions:

1. Are CBDCs on the Blockchain?

Unlike stablecoins, CBDCs are not on the blockchain. Instead, they're a part of the traditional financial system (TradFi), which is run by centralized banks. This means that the privacy and security of CBDCs are much lower than those of stablecoins. However, this doesn't necessarily mean that CBDCs won't be integrated into blockchain systems in the future.

2. Are CBDCs Stablecoins?

No, CBDCs are not stablecoins or cryptocurrencies. Like stablecoins, they are digital assets that represent a real-world asset (fiat money), but unlike stablecoins, they are issued and governed by central and legal bodies.

3. How Can CBDCs and Stablecoins Coexist?

Both CBDCs and stablecoins have their advantages and drawbacks, but there is potential for them to coexist in the financial system. For example, some experts believe that CBDCs could be used as a bridge between traditional finance and digital assets like stablecoins. This would allow users to transfer funds between each asset class without having to incur the price volatility of crypto-assets.

What Does the Future Hold for CBDCs & Stablecoins?

Overall, it's difficult to predict the future of CBDCs and stablecoins. However, most experts agree that both asset classes have the potential to benefit the global economy in different ways. If, for example, CBDCs start implementing blockchain technology, we could see them coexisting with stablecoins, effectively creating a connection between digital and real assets.

It's also worth mentioning that stablecoins are slightly more risky assets, as shown by the collapse of the Luna and UST tokens in May 2022. This begs the question—is buying stablecoins worth it? While the recent bear market might discourage users from buying stablecoins, they're still a relatively safe and practical digital asset.

However, this is true only if you're buying and holding reputable stablecoins, like USDT (Tether) and USDC (USD Coin). These coins are audited and backed by reserves, which wasn't the case with algorithmic stablecoins like UST.

» If you're interested in how stablecoins work, reading about the Fei protocol could offer some answers.

Bottom Line

Although they have some similarities, the truth is that CBDCs and stablecoins are two different asset classes with distinct qualities and drawbacks. While CBDCs are backed by governments and represent fiat currency, stablecoins can represent any type of asset—including commodities like gold and silver.

The truth is that there is some potential for these two assets to coexist in the global financial system, but it's still too early to tell how they will eventually interact with each other. For now, we'll just have to wait and see.