CBDCs and Stablecoins: What are They & How Do They Differ?
As cryptocurrencies have exploded in popularity, we have seen an equally impressive rise in new use cases for blockchain-based technology.
Two types of digital currencies are hot on the minds of banking authorities and investors: CBDCs and Stablecoins. Both of these currencies take the basic framework of cryptocurrency and alter it in an attempt to achieve a more stable digital currency.
In this article, we define what CBDCs and Stablecoins are, how they differ, which is the better investment / financial instrument, and its implications to you as a consumer and citizen. Keep reading to learn how Webacy helps protect your digital currency and blockchain assets.
What is a CBDC?
The term CBDC stands for Central Bank Digital Currency.
A CBDC is a digital currency that is issued and backed by a centralized financial authority or bank.
The idea to create a CBDC was born out of the rising popularity of cryptocurrency. Governments and banking authorities around the globe have taken note of the economic potential crypto presents, using crypto as a framework to develop their own digital currencies. Instead of issuing paper currency or using centralized electronic systems to keep track of money, blockchain technologies are proposed instead.
CBDCs are still a relatively new concept within the global banking industry, with many countries working in the research and development stages to create their own CBDCs.
What is a Stablecoin?
A Stablecoin is a cryptocurrency whose value is based on a reference asset, such as a fiat currency like the U.S. Dollar (USD) or the Euro, or another more established cryptocurrency, like Bitcoin.
The value of a Stablecoin is determined by a price peg. This price peg can be maintained by a reserve of assets used to back the value of the Stablecoin.
Stablecoins can also be algorithmic, which can be both backed or unbacked by a reserve. The price of the Stablecoin is maintained by an algorithm that controls the supply of the Stablecoin.
This type of currency was created primarily to offer an alternative route to investing and buying into cryptocurrency, as well as for converting alt coins and crypto into tokens that are as usable as possible (as they are not as volatile as big-name cryptos like Bitcoin and Ethereum).
Additionally, with the right balance of regulation, Stablecoins potentially open new opportunities for crypto to be used as a medium of exchange.
How are CBDCs and Stablecoins Different?
Though both utilize blockchain technology, a primary distinction between CBDCs and Stablecoins is that CBDCs use private (permissioned/authorized) blockchains, while Stablecoins use public (permissionless) blockchains.
@Blockworks_ shared a helpful comparison of CBDCs and Stablecoins. Among the many differences between the two, five key distinctions include:
- Legality: One of the biggest differences between CBDCs and Stablecoins is the current legal classification of each currency. CBDCs are still widely considered theoretical among central banks, while Stablecoins are beginning to see more widespread legal classification throughout the United States and Europe with additional regulation coming with fears of depegging (proof of reserves and wallet transparency required).
- Issuance & Governance: CBDCs are meant to be centralized, meaning they must be issued by a central bank. Meanwhile, Stablecoins can be issued by both regulated banks and non-bank entities. As for governance, Stablecoins can be governed by both regulated banks and non-bank entities. CBDCs, in theory, would be governed by central bank authorities.
- Technology Infrastructure: Being a product of a centralized banking system, CBDCs would utilize permissioned or proprietary technology. On the other hand, Stablecoins can use multiple open-source, non-proprietary, and permissionless blockchains as their main tech infrastructure. This also gives Stablecoins access to the distributed ledger technology of the blockchain.
- Geographic Scope: Stablecoins are not limited by geographic boundaries and can be purchased or used all around the globe. By contrast, CBDCs are being developed primarily for domestic use, with cross-border interoperability capabilities as well. Overall, Stablecoins are more convenient to use anywhere, whereas CBDCs would have region-specific uses (for the most part).
- Wallets: The final key difference we want to highlight between CBDCs and Stablecoins is how they are stored. Stablecoins can be stored in any digital wallet compatible with the currency being bought and sold. CBDCs, however, would likely need to be stored in a proprietary wallet solution issued by the government or authorized banking intermediaries.
Are CBDCs or Stablecoins a Better Buy?
When comparing CBDCs and Stablecoins, it is hard to say which would be a better investment or asset to buy, depending on the utility you desire.
As CBDCs are still largely under development and theoretical in nature, it is difficult to fully compare the two types of currency. CBDCs do have the potential to offer a more secure form of blockchain and digital currency investment but could never offer the same peer-to-peer functionality as a permissionless alternative, such as Stablecoins.
As of December 2022, more than 100 countries are working on CBDCs, with major regions like the U.S., Canada, and Europe in the development stage.
The key advantage to investing in Stablecoins is that this currency makes it easier and potentially safer to invest in cryptocurrency. Stablecoins are pegged to fiat currencies, enabling them to gain real-world value that is tied to a more stable and centralized currency. They allow you to convert your alt-coins and other crypto assets like NFTs into something as close as possible to a real dollar.
However, Stablecoins are far from perfect, and several Stablecoin projects have turned out to be scams and other bad investments that have tarnished the reputation of Stablecoins.
For instance, the collapse of TerraUSD and its sister token Luna sent shockwaves through the Stablecoin markets. These currencies that were meant to be pegged to a fiat currency for stability dropped well below that pegged value, leading to more than $400 billion in losses across the crypto markets.
Following the Terra and Luna fiasco, regulators began paying closer attention to Stablecoins than ever before. Since these currencies are pegged to centrally regulated fiat currencies, Stablecoins are easier for regulators to influence than fully decentralized cryptocurrencies.
According to a September 2022 report from the International Monetary Fund (IMF):
“Global regulation for stablecoins should be comprehensive, consistent, risk-based, flexible, and focus on their structural features and use. Requirements on stablecoins should cover the entire ecosystem and all its key functions, and there should be additional oversight for systemic stablecoin arrangements.”
New legislation is being introduced in various countries to further the regulation of Stablecoins, such as the Stablecoin TRUST Act proposed in the U.S. Senate and the Markets in Crypto Assets Regulation (MiCA) proposed in the European Union.
As Stablecoins become more widely regulated, the risks associated with scams are likely to diminish, making Stablecoins a safer and more accessible avenue to crypto for the average consumer.
Final Thoughts: Secure Your Stablecoins & Crypto Assets with Webacy
While CBDCs still have a ways to go before being ready for public investments, Stablecoins have been available to anyone with the resources to buy them for several years now.
For anyone interested in Stablecoin investments, it is crucial to learn how to protect these assets.
Stablecoins are built on blockchains, requiring you to have a digital wallet solution to buy, sell, and manage your Stablecoins. This wallet can also be home to any other cryptocurrencies, NFTS, or other digital assets you may possess.
Keeping your wallet safe is of the utmost importance — especially as more blockchain equivalents for real-world assets begin to appear.
With Webacy, you can keep your Stablecoins, cryptocurrencies, and other assets safe long-term.
Our self-custody solution allows you to connect the wallet of your choice to our platform. Once connected, you can use the Backup Wallet feature to ensure you always have access to your assets. Plus, features like our Panic Button allow you to transfer assets to the Backup Wallet on demand. Wallet Watch also allows you to keep tabs on all of your wallets so that you are aware of all activity, no matter how many wallets you have. Get started with Webacy today to learn more.