Are CBDCs the better stable coins for international payments?

Stable coins and Central Bank Digital Currencies (CBDCs) are both digital forms of currency and are solving similar problems, but they are not the same.

Quick recap: What are stable coins and CBDCs?

Stable coins are digital assets that are pegged to a fiat currency, such as the US dollar, and are designed to maintain a stable value. They are often used as a means of facilitating transactions on blockchain-based platforms, such as cryptocurrency exchanges. Examples of stable coins include Tether, USDC, and DAI.

CBDCs, on the other hand, are digital versions of a country's fiat currency that are issued and backed by a central bank. They are designed to be used as a means of payment in the same way as physical cash, and can be used for both online and offline transactions. Unlike stable coins, which are often issued by private companies, CBDCs are issued by a central authority and are subject to regulations and oversight.

There's a large difference in risk of defaults

One key difference between stable coins and CBDCs is the level of third-party risk. Stable coins are often issued by private companies, which means that there is a risk that the company may not be able to meet its obligations to back the stable coin with the underlying fiat currency. In contrast, CBDCs are issued and backed by a central bank, which reduces the risk of third-party default.

Another difference is the level of control over the money supply. With CBDCs, the central bank has the ability to control the money supply, which can be used to stabilize the economy during times of crisis. In contrast, stable coins are not subject to the same level of monetary policy control, which can make them more susceptible to market fluctuations.

CBDCs also have the potential to increase financial inclusion by providing a digital alternative to cash for those who may not have access to traditional banking services. They can also increase the efficiency of financial transactions by reducing the need for intermediaries, such as banks and payment processors.

Can the lender of last resort fail?

However, there are also potential dangers associated with CBDCs, including the risk of financial instability if the central bank loses control of the money supply, and the potential for increased government surveillance of financial transactions. Additionally, there are concerns about the security and privacy of CBDCs, as they rely on digital infrastructure that is not build on a decentralized network, but needs to allow central players to decide monetary policy. If stable coins were to be used in a decentralized network, like the Bitcoin Blockchain, it could offer the best of both worlds.

An example for this is the Bitcoin Lightning Network, which is currently testing the use of stable coins in the decentralized payment network. The Lightning Network allows for faster and cheaper transactions by conducting them off-chain, rather than on the main blockchain. This makes it an ideal platform for stable coins, as it allows for near-instant and low-cost transactions. Using stable coins on the Lightning Network can also provide an additional layer of security and privacy, as transactions can be conducted without the need for a central intermediary. Additionally, stable coins on the lightning network can be used to facilitate micropayments, which is not possible with traditional payment methods.

What to keep an eye on

The outlook for CBDCs and stable coins is uncertain, as the technology is still in its early stages and there is much debate about the best way to implement them. However, it is clear that both CBDCs and stable coins have the potential to transform the way we use and think about money, and they will continue to be an important area of research and development in the coming years.

In conclusion, CBDCs and stable coins are not the same. They have different use cases and are backed and controlled by different entities. CBDCs are issued and backed by the central bank, which reduces third party risk, offer increased financial inclusion and potentially more efficient financial transactions, but also have potential dangers such as financial instability, increased government surveillance and security and privacy concerns. On the other hand, stable coins are digital assets pegged to fiat currency, primarily used for facilitating transactions on blockchain-based platforms and are issued by private companies.