By Anton Chashchin
Nowadays, the transformation of the global financial landscape is gaining momentum. Central Bank Digital Currencies (CBDCs) were expected to become a new worldwide financial standard. 19 countries out of G20 are in their advanced stages of CBDCs exploration and 13 countries are in their pilot stages. At the same time, Jamaica, Nigeria and the Bahamas have already launched their own CBDCs.
Nevertheless, not all countries fully support this initiative. The USA, chaired by President Donald Trump, is advocating for the integration of stablecoins as an alternative to CBDCs. In doing so, this support for private digital currencies could have a significant impact on global business, investors and the entire financial sector.
So what will dominate global finance in the future and will the US initiative become the answer to digital currencies?
Stablecoins or CBDCs: What’s More Advantageous?
Today, the market capitalization of stablecoins stands at $223 billion with USDT ranking at $139.5 billion, conceding only Bitcoin and Ethereum. The decentralized nature of stablecoins is what makes them more accessible and convenient to use. This undoubtedly tips the balance in favour of them compared to traditional currencies or CBDCs.
Many people and companies actively use stablecoins to make payments, invest, and save. Not only do stablecoins work on blockchain, meaning that transactions are faster and more secure, but they are also linked to the fiat currency, making the exchange rate stable. Moreover, such digital assets do not require complex infrastructure to operate efficiently because they do not depend on conventional bureaucratic processes.
In the meantime, CBDCs also have their strong points. In fact, the most important thing about this form of digital currency is that it facilitates cross-border payments. That is, it can be included into existing international payment systems without pondering new approaches. Another advantage of CBDCs is that they can help people in developing countries to improve financial inclusion and enhance financial stability.
Moreover, CBDCs are backed by the government stockpile, while stablecoins depend on emitters, i.e. private corporations, which promise to keep a certain amount of assets as collateral. Hence, the risk of losses for stablecoin users in case of a financial crisis or bankruptcy of private companies is high.
CBDCs Fragmentation Risks for Global Systems
So, it is evident that both CBDCs and stablecoins have their advantages and shortcomings, and if Trump’s administration finds stablecoins as an alternative to CBDCs, then it must create clear control and monitoring mechanisms. Why?
The main drawback of CBDCs is in the fact that it can fragment the entire financial sector. It makes sense to take a look at this situation from the standpoint of CBDCs influence on the three geoeconomic power centers of the world: China, Europe and the USA. A broad integration of CBDCs by the biggest countries will result in the loss of dollar’s strength, which threatens the domination of the United States in the world. This is why Trump’s administration comes up with a stablecoin’s adoption.
Regarding China, a wide incorporation of digital yuan helps the government to take control over the private technological sector by having the access to realms of digital data. This may be helpful for the country in the development of artificial intelligence, hence accelerating the global AI race. Amidst the potential of integrating digital euros, the European financial market also faces challenges. There is a risk that depositors may start moving money from the commercial banks to the central one and this will reduce the ability of the traditional banking system to provide credit.
In general, if countries start developing their own currencies, which have their own rules, standards and peculiarities, it may bring fragmentation risk for global systems and contradict the idea of creating a united, centralized network.
The U.S. Stablecoin: A Decent Answer to CBDCs?
Trump’s administration is the one that stands for the gradual integration of stablecoins into the economy instead of creating their own digital currency, especially since stablecoins such as USDC and USDT are linked to the dollar. Federal Reserve Chair Jerome Powell sticks to the same opinion, claiming that the possibility of launching an electronic version of the dollar while he is in charge is excluded.
But I should mention that there are several types of stablecoins existing nowadays. They include crypto-backed, fiat-pegged, commodity-pegged, and treasury-backed ones. The U.S. officials now believe that over-collateralized stablecoins backed by Treasury bonds and dollar deposits will help the dollar to preserve its dominant position as it improves payment infrastructure and circumvents capital control in certain countries.
What comes to the possibility of creating a crypto-backed stablecoin, it may make sense, but it requires the development of a complex infrastructure to make crypto-backed stablecoins align with the current regulatory framework and not to be exposed by market volatility. Donald Trump has signed the order to establish a strategic national reserve and this may indicate his intention to think about adoption of such stablecoins.
Still, many factors should be considered before making a final decision on what type of stablecoin will stand as the best alternative to CBDCs. If the USA will keep moving toward the idea of adopting stablecoins backed either by cryptocurrencies or the U.S. treasury bonds, this may lead to long-term shifts in the financial market.
All in all, even though the USA finds stablecoins an alternative to CBDCs, this initiative has its own pitfalls. Time will show what approach becomes successful, but it’s clear that digital currencies nowadays shape a new reality.
About the Author
Anton?Chashchin, Founder & CEO of private fintech group?N7 Capital. N7 Capital focuses on developing innovative fintech solutions, with interests across fintech, banking, IT, e-commerce, blockchain, and digital assets. Mr.?Chashchin?is a seasoned investor, advisor, philanthropist, and visionary business leader with over 15 years of experience driving innovative projects across Europe and globally. Mr.?Chashchin?advises business leaders, boards on growth strategies, operational scaling, funding guidance, and advancing financial technologies.
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