Stablecoins and CBDCs are two of the biggest buzzwords in the financial industry. Ultimately, they are revolutionizing payment rails by providing a more efficient and convenient system.
But you may be wondering. What is the difference between stablecoins and CBDCs?
Don’t worry. In this article, I will be covering what they are and the key differences. So without further ado, let’s jump right in.
What are stablecoins?
Stablecoins are cryptocurrencies pegged to traditional currencies. For instance, the stablecoin Tether maintains a 1-to-1 peg with the US dollar.
They utilize blockchain technology making them decentralized with each transaction being transparent and immutable.
What are CBDCs?
CBDC stands for central bank digital currencies. Simply put, they are digital currencies issued by the central bank.
They are pegged to the nation’s FIAT currency and are regulated by the nation’s monetary authority. The goal of CBDCs is to provide a more efficient way of implementing monetary and fiscal policies.
|Democratic control||Authoritative control|
|Cryptographically secured||Single point of failure|
|Open & transparent||Closed Database|
|Pseudo anonymity||Identity disclosed|
|Widely adopted||Still in the research phase|
The payment rails for stablecoins are more decentralized when compared to CBDCs. Ultimately, they are secured by a network of decentralized computers. Transactions are done on a peer-to-peer basis.
That being said, in most cases the funds backing the stablecoin are stored in a centralized location with authoritative control e.g a bank. Conversely, CBDCs are strictly managed by the central bank.
As stablecoins are decentralized they are not subject to control from a centralized authority. This makes them censorship resistant.
Moreover, they are permissionless. Anyone can interact with stablecoins. There is no extensive application process or KYC procedure. All a user needs is a computer and an internet connection.
Conversely, CBDCs are governed by the central bank. Ultimately, they have complete control. Therefore, they can authorize or deny transactions.
This can be good for combating criminal activity. However, it also provides less freedom and has the potential to be abused. For instance, if you do not share the same political views they can restrict your account.
CBDCs are more centralized. As a result, there is a single point of failure. Not to mention, there is one large honeypot for malicious actors to target.
Conversely, with stablecoins, the network security is maintained by a decentralized network of computers that utilize cryptographic technology. Consequently, it requires considerable computing power to take down the network.
Thanks to blockchain technology, stablecoin transactions are completely transparent. They can all be verified to guarantee authenticity and to also highlights malicious activity.
Whereas, CBDCs are essentially closed databases. Users cannot view the transactions.
Although every stablecoin transaction is viewable on the blockchain the privacy of users is maintained. All in all, the disclosure of users’ identities is not required.
On the other hand, CBDCs require full disclosure of users’ personal information. This includes name, address date of birth, etc. As a result, there is no privacy.
At the end of the day, stablecoins have a first-mover advantage. They have been around for the better part of a decade with the most popular stablecoin Tether having a market cap of over $60 billion.
Now when it comes to CBDCs, in most countries they are yet to be implemented. Countries such as the United States and the UK are still researching them. Therefore, they have some catching up to do regarding adoption.
If you want to view this article in a more visual format then please check out my video below:
Will CBDCs replace stablecoins?
This depends on future demand and legislation. For instance, if people don’t value a decentralized digital currency or the regulation is strict then this can hamper the adoption of stablecoins.
Is CBDC a threat to cryptocurrency?
CBDCs are unlikely a threat to cryptocurrency for two reasons. Firstly, cryptocurrencies are robust. To take down the network you have to shut down every computer.
Secondly, they serve different purposes. Cryptocurrencies include various use cases from decentralized applications to being stores of value while CBDCs are strictly a medium for payments.
Is CBDC a cryptocurrency?
No, CBDCs are not cryptocurrencies. Instead, they are central bank-issued FIAT currencies.
As you can see, the main difference between stablecoins and CBDCs is who controls them. On the one hand, stablecoins provide a more democratic option. On the other hand, CBDCs are governed by the central bank.
Overall, both have their pros and cons and will likely coexist in the future. I hope you found this article useful and thanks for reading it.
Want to learn about the 12 pros and cons of stablecoins? Click here to read my previous article.