Five Essential Things You Should Know About CBDC and Stablecoins

Following the introduction of Decentralized Finance (DeFi) and the first stablecoin in existence, DAI, stablecoins and Central Bank Digital Currencies (CBDC) have become much more relevant to today’s economy. The main difference between CBDC and stablecoins stem from the status of the currency. For example, while both are pegged to a fiat currency, only CBDC holds the status of legal tender, issued by central monetary authorities.

5 essential points when it comes to knowing what CBDC and stablecoins are.

#1 What is a CBDC?

Central Bank Digital Currency, or CBDC is a form of digital money that is “government-backed, fiat money.” This means that this digital currency is a version of a country’s legal national currency (i.e. in the U.S., a CBDC would be issued by the Federal Reserve). In 2022, 87 countries have indicated a potential launch of CBDCs. Today, 9 countries have already launched CBDCs. These countries include Nigeria, The Bahamas, and more. In the USA, President Joe Biden included in the Executive Order to research CBDC along with cryptocurrencies.

#2 What is a stablecoin?

Stablecoins, as a type of cryptocurrency, are pegged against a country’s fiat currency. Some popular stablecoins (or stable currencies) today include Tether (USDT), USD Coin, Dai (DAI), Binance USD (BUSD) and more. Stablecoins exist to reduce volatility, or changes in price. These coins are typically tied to a “reserve asset” or a “commodity” that has a relatively fixed value. The stability of stablecoins can be used as a “functional currency within a crypto brokerage” for many crypto investors, as “traders [may] convert Bitcoin into a stablecoin such as Tether, rather than into dollars.” Additionally, stablecoins can be used with smart contracts to secure transactions, they require lower fees, and are available 24/7.

#3  What are the main benefits of CBDC and stablecoins?

Since the pandemic, many payments have gone paperless to reduce the spread of germs through contact payments. At the same time, countries globally are introducing digital forms of fiat currency for the secure transaction of the same currencies. Many banks worldwide are investigating the feasibility of CBDCs, while 28 central banks have already launched their pilot CBDCs to test the waters. Mastercard has launched a CBDC testing platform, and Visa is also working with over 60 crypto platforms to “issue cards linked to digital currencies like USD Coin” to test the application of digital currencies.

Benefits of CBDC and stablecoins include faster and less expensive transactions, consumers can access central bank funds with CBDCs, risk of storing money with commercial bank collapse is removed as CBDCs are valued to the central bank, and money is easier to track as all transactions are recorded on a digital ledger.

#4 How are we impacted by CBDC and stablecoins?

Today, more pilot CBDC and stablecoins are appearing worldwide. Recently, the Republican members of the US House Committee in Finance sent a letter to the Federal Reserve Chair “outlining the tasks they see as most salient in the path toward a central bank digital currency (CBDC).” For example, if CBDC and stablecoins were to be implemented under government regulations, this would revolutionize modern banking. In the letter to the Federal Reserve Chair, they highlight the potential of transacting in stablecoins, which would have “the potential to be a more efficient, faster, and less expensive payment option than what currently exists.” If CBDC and stablecoins were to be established, many would be impacted by the change in regulations surrounding digital assets and a differing means of payment for goods and services. 

For example, Mastercard, one of the largest consumer payment processors in the world, is preparing an infrastructure for the deployment of CBDC. Additionally, Visa is also supporting transaction settlements with USDC stablecoin

#5 What does the future of CBDC and stablecoins look like?

CBDC and stablecoins have reached a market capitalization of $30 billion in 2021, and more than $175 billion this year. While the three popular stablecoins stay strong (Tether’s USDT, Centre’s USDC and Binance’s BUSD), more stablecoins are being developed, and pegged against fiat currency. Additionally, with Mastercard and Visa initiatives, CBDC and stablecoins may have greater applications in the coming future for retailers. Stablecoins can also be used for the trading or purchasing of digital assets, peer-to-peer transfers, and in the future, may also be used as a “means of payment for retail goods and services.”

In conclusion, CBDC and stablecoins have the potential to change how we secure, manage, and exchange digital currencies. This year, 87 countries have indicated their interest in CBDC research. Meanwhile, the market capitalization of stablecoins is over $175 billion and growing. Payment processing leaders such as Mastercard and Visa are researching and implementing stablecoins as digital currencies for users and testers. Perhaps in the future, more applications of stablecoin and CBDC can be seen. To keep up-to-date with CBDC and stablecoins, keep educating yourself by taking online courses at Innov-Edu.

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***This article is not meant to offer any tax, investment or trading advice. The author of this article is not a licensed tax, investment or financial advisor***

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