It all started in 2008. Bitcoin’s creation drove many individuals to jump on the train of digital currencies and each year saw the formation of another different digital asset. To this day, there are tons of different digital asset classes like stablecoins, non-fungible tokens (NFTs), decentralized finance (DeFi) tokens, GameFi, and countless others. Now even CBDCs – Central Bank Digital Currencies try to join this sphere.
Bitcoin has kickstarted the growth of digital assets, which has not slowed down ever since. While stablecoins are an integral part of the crypto space, CBDCs are just about to be introduced and aim to be used mainstream. Let’s see what they are in-depth, because they are not the same.
But first, what is a stablecoin?
Stablecoins are a type of cryptocurrency whose value is pegged to an asset from the real world, such as the U.S. dollar. There are even stablecoins tied to commodities like Paxos Gold (PAXG). There are reserves behind stablecoins, which is what keeps their price stable. Traditional cryptocurrencies like Bitcoin have limited practicality as a form of payment due to extreme price volatility. This inspired the creation of alternative cryptocurrencies known as stablecoins.
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A stablecoin has a critical role in the crypto space. For example, DeFi allows for transactions to be made without an intermediary, and stablecoins have become an inseparable part of this asset class. The largest and most trusted stablecoins are currently Tether (USDT), USD Coin (USDC), and Binance USD (BUSD). They are also in the TOP 10 cryptocurrencies according to a market cap (see coinmarketcap.com or coingecko.com).
Crypto is not all about trading or investing. Some individuals want to participate by using alternative methods like lending, borrowing, and financing. Stablecoins have a variety of benefits, but they are closely watched by regulators, mainly after a well-known Terra’s stablecoin USTC depegged from $1 to just two cents.
There is little risk connected to using stablecoins as more of them had liquidity issues in 2022. However, using the largest ones should be the least risky as they were tested with time. USDT depegged to $0.98 a few times in the past but always came back to $1.
What is a CBDC?
Central Bank Digital Currency, or CBDC, is digital money representing the country’s currency, backed by the government. It’s the same as your dollars or euros in your wallet, but digital. However, there is no asset backing behind CBDCs, which is the same case for cash for instance.
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While you could move your bank notes around without the government knowing, this will be a thing of the past with CBDCs. This digital version of a fiat currency will be highly traceable as all transactions will be recorded on a private, government blockchain. In 2022, it’s still fairly a new concept as central banks have only begun to test digital versions of their currencies.
For example, the United Kingdom, Turkey, and Kazakhstan are all working on their CBDCs, looking to launch in 2023. CBDCs are coming whether we like it or not. The COVID-19 pandemic has kickstarted a more digital culture, and governments want their CBDCs to be a part of it. These digital currencies should provide their users with higher accessibility, reduce transaction costs and decrease the maintenance of nowadays’ complex systems.
Main differences between a stablecoin and CBDC
Many argue that there is no central authority in charge of stablecoins, but The Security and Exchange Commission (SEC) is closely monitoring the activities of stablecoin issuers. On the other hand, CBDCs will be automatically monitored by the government.
Stablecoins are pegged to fiat currencies or commodities with real reserves to back up these stable cryptocurrencies. However, CBDCs won’t be backed by anything, just like cash. On the contrary, cash or CBDC will be a legal tender while stablecoins are not. Yet.
One of the key differences is that institutions like Circle or Binance issue stablecoins, but only governments can issue CBDCs. There are exceptions where countries like El Salvador make Bitcoin a legal tender, nevertheless, it is rather unusual at the moment.
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Most importantly, stablecoins operate on public blockchains, where anyone can access the database of transactions. On the other hand, the government’s CBDCs will run on private blockchains, whose information will only be available to them.
The tension between stablecoins and CBDCs seems to be growing, yet it’s clear they have different use cases. Although stablecoins could be used more than in just crypto space, governments want their own version of a fiat currency.
Thus, stablecoins will probably stay “in the shadows” while CBDCs will be used for basic retail transactions like buying groceries. However, cryptocurrencies are slowly, but surely, making their way into the hands of regular people, who use them for normal day-to-day transactions.