Will central banks allow stablecoins to survive? Can they peacefully co-exist with central bank digital currency as a financial instrument for the unbanked?
There’s a ferment brewing with regard to central bank digital currencies (CBDCs), and most people really don’t know what to expect. Varied effects seem to be bubbling up in different parts of the world.
Consider this: China’s e-CNY, or digital yuan, has already been used by 200 million-plus of its citizens, and a full rollout could happen as early as February — but will a digital yuan gain traction internationally? Europe’s central bank has been exploring a digital euro for several years, and the European Union could introduce a digital euro bill in 2023. But will it come with limitations, such as a ceiling on digital euros that can be held by a single party? A United States digital dollar could be the most awaited government digital currency given that the dollar is the world’s reserve currency, but when will it appear, if ever? Implementation could be at least five years away.
Amid all this uncertainty, one question has persisted, at least in the cryptoverse: What impact will large-economy digital currencies have on stablecoins? Would it leave them any oxygen to breathe?
On the positive side, some believe that most large-scale CBDCs will go the wholesale route — i.e., allowing direct access to digital money by a limited number of large financial institutions. If so, could this leave a “retail piece” for stablecoins in the payments sector?
“Their wallets or accounts might be held by intermediaries like commercial banks, who then have claims on the central bank. But effectively, most CBDCs will be used for retail payments,” Gerard DiPippo, senior fellow at the Center for Strategic & International Studies, told Crypto Express: “This includes China’s e-CNY, which many believe will be the first large-economy CBDC to be rolled out at scale.”
“While it’s still early to make a call, I would expect that CBDCs will be accessible by both retail and wholesale parties,” Arvin Abraham, a United Kingdom-based partner at law firm McDermott Will and Emery, told Crypto Express, adding that
Assuming, then, a retail contest arises between stablecoins and CBDCs, which is likely to prevail?
“The obvious advantage of stablecoins is that they exist or are at least further along than most CBDCs. This is especially true in the U.S. context,” said DiPippo. “I think a U.S. CBDC would take many years to deploy even if authorized by Congress today.”
On the other hand, others believe that CBDCs, if and when they appear, will make stablecoins redundant. Consider that the two leading stablecoins, Tether (USDT) and USD Coin (USDC), are both linked to the U.S dollar and both aim for a 1:1 peg.
“In a world with a U.S. dollar CDBC, the need for these coins goes away, as there will be a crypto native alternative that is always backed 1:1 by the dollar and is effectively interchangeable with its fiat equivalent,” said Abraham.
But maybe the outcome isn’t binary, a choice of one or the other. Perhaps they can peacefully coexist, a possibility that has been put forth by no less of an authority as the U.S. central bank’s second-highest-ranking official.
“If private monies — in the form of either stablecoins or cryptocurrencies — were to become widespread, we could see fragmentation of the U.S. payment system into so-called walled gardens,” Federal Reserve Vice Chair Lael Brainard testified in a May congressional hearing, adding that: “CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem.”
Is this harmonious scenario realistic? “I see no reason why stablecoins and CBDCs cannot coexist,” DiPippo told Crypto Express. “In practice, their degree of coexistence will depend in part on regulations, specifically whether some governments even allow stablecoins for payments — especially in the cross-border context.”
Much will depend on the user experiences, cost advantages, and general usability of each instrument, DiPippo added. “In general, I have more confidence in the private sector to succeed in these respects. I’m not so much worried about stablecoins being ‘crowded out’ as I am worried about them being banned.”
Cryptocurrency exchange Coinbase not only believes in cohabitation but says CBDCs may even boost stablecoins, according to a July white paper. “We strongly believe CBDCs will complement and encourage robust, inclusive, and safe innovation for stablecoins and the broader digital asset economy.”
Stablecoins are in a better position to innovate than CBDCs, Coinbase adds. “In addition to having a first-mover advantage, stablecoins are expected to continue to rapidly evolve and innovate over the coming years, experimenting in ways CBDCs may not be able to due to differences in size and scope.”
CBDCs, too, may come freighted with certain constraints from which stablecoins could be exempt. In its quest for a digital euro, the European Central Bank is “exploring a 3,000 euro limitation on the amount of digital euro that can be held by one party, based on various policy considerations,” the white paper notes. If that were to happen, stablecoins would arguably be able to serve those “needing a larger holdings of a digital fiat currency equivalent.” Stablecoins might also offer higher interest rates than CBDCs, the paper suggests.
“There could still be a role for stablecoins alongside CBDCs, although it would be more limited than today,” acknowledged Abraham. Stablecoins could have utility in providing a convenient means to have an interest in a basket of stocks, commodities and others. That is, “Their function would be more akin to tracker funds where value is pegged to several assets.”
Then, too, a U.S. CBDC may not be ready for a full rollout for another five years, wrote Thomas Cowan, part of the team at the Boston Fed that in February released a technical research paper on potential CBDC designs in a recent blog:
In Europe, though, the outlook for stablecoins — or “so-called ‘stablecoins,’” as some EU officials call them — could be more problematic. The Markets in Crypto-Assets (MiCA) regulation, expected to take effect in 2024, presents “a number of challenges for stablecoins,” said Abraham, most notably a ban on the paying of interest by stablecoin issuers.