Will Stablecoins Or CBDCs Replace Fiat Currency?

Stablecoins are blockchain-based digital currencies with their value pegged to fiat currencies like the US dollar. Since stablecoins lack volatility, unlike their cryptocurrency counterparts that can gain or fall double-digit percentages in a matter of hours, they are deemed crucial for crypto adoption.

Indeed, stablecoins are known as the backbone of the crypto ecosystem. Courtesy of their approvable stable value, stablecoins have been successful in bringing crypto to big players. These fiat-backed private digital money have given institutional investors a gateway to tap key opportunities within the booming crypto ecosystem.

On the other hand, Central Bank Digital Currencies (CBDCs)are the government-backed version of stablecoins, issued by a nation’s monetary authority or central bank. Due to their structure, CBDCs give governments unrivaled control over money. While government coins can simplify the implementation of monetary policy, they are deemed a disaster for user privacy.

The Current State of Stablecoins

Stablecoins have surged in popularity lately. While the total market cap of these currencies was around $20 billion by 2020, that figure has spiked to a whopping $120 billion. Moreover, in the first half of 2021, the cumulative stablecoin transaction volume was nearly $3 trillion. In comparison, the total transaction value of stablecoins for the entirety of 2020 was just north of $1 trillion.

USDT, with a circulating supply of over $68 billion, remains the dominant player in the stablecoin territory, accounting for approximately 60% of the stablecoin market share. Other big players include USDC, BUSD, and DAI, which have expanded their market share to 23%, 9%, and 5% by Q3 2021, respectively.

Given this spectacular growth, it is evident that stablecoins are becoming an integral part of the financial world. However, this has not come without controversy. Officials from around the globe are scrutinizing stablecoins over their reserve compositions.

Stablecoins are used to claim that all their tokens are backed 1:1 by cash reserves. However, as the companies reported a breakdown of their reserves and transparency increased, it became apparent that they have far lower levels of genuine cash equivalents — so much so that it could trigger a crash in the event of a run.

The Current Landscape of CBDCs

Amid the recent crypto boom and an increased tendency for digitization, more countries are now exploring a CBDC. As of now, 81 countries, which represent over 90% of the global GDP, are in the stage of exploring a CBDC. Notably, 5 countries have already rolled out a digital currency, with the Bahamian Sand Dollar being the first CBDC to emanate.

Among exploring countries, China is leading the race. China started investigating a digital yuan project back in 2014, while the majority of other countries have embarked on their CBDC journey in the last year or so. While China is fast approaching its e-CNY launch, the United States is furthest behind.

Aside from China, 13 other countries are also launching pilot trials for their CBDCs, preparing for a possible full launch. Major economies like Sweden, Russia, and South Korea are on this list.

Stablecoins and CBDCs to Complement Fiat Currencies

It is apparent that stablecoins have been exceptionally successful in gaining mainstream adoption. Considering that CBDCs come with a number of privacy concerns, they might not be that lucky. However, if governments manage to address such concerns, CBDCs could also become an integral part of the future financial world.

Stablecoins have gained popularity because they ease cross-border payments. CBDCs, which are largely a rival to stablecoins, also aim to make cross-border transactions more efficient and cheaper. However, both of these currencies are created to complement fiat currencies, not to replace them.

Above all, both stablecoins and CBDCs are pegged to fiat currencies, implying that they are merely the digital forms of fiat. If there is no fiat currency, then its digital iteration would make no sense.

In an article for Harvard Business Review, research scientists Christian Catalini and Jai Massari also argued that CBDCs and stablecoins would not replace fiat currencies, rather will make them more efficient. They said:

“CBDCs and stablecoins are strong complements, not substitutes. The public sector could focus on issuing digital coins and delivering on sound money, while the private sector could build rails and applications.”

#crypto #cryptocurrency #stablecoin #cbdc #USDT

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