The era of digital currency seems to have found the backing of asset-pegged cryptocurrency such as stablecoins and central bank digital currencies (CBDCs). However, the question now arises on how those two currencies can coexist in the global monetary landscape.
According to McKinsey & Company, a management consulting firm, around three trillion dollars worth stablecoins such as Tether and USDC were transacted in 2021’s first half. It is believed that CBDCs’ creation have developed on account of privately-issued stablecoins’ influence on financial stability and global monetary policy. “In my opinion, stablecoins and CBDCs could coexist and complement each other if stablecoins are used for specific purposes within a given ecosystem, while CBDCs are used as a general-purpose means of exchange and store of value within an economy,” Karan Ambwani, India lead, dYdX Foundation, a decentralised company, told FE Blockchain.
Market research has shown that coexistence between stablecoins and CBDCs can provide clarity around cryptocurrency regulations. Insights from Cato Institute, a think tank, stated that a federal regulatory framework around stablecoins can spur innovation in financial markets. The platform also highlighted that CBDCs for retail customers could be as beneficial as stablecoins. “I believe CBDCs and stablecoins enable low-risk handling of fiat currencies. The innovations in crypto domain have shown possibilities for decentralised finance (DeFi) but as of now they all rely on volatile cryptocurrencies. CBDCs and stablecoins can bring these innovations to non-crypto native users,” Swapnil Pawar, founder, Newrl, a blockchain-based organisation, stated.
It is believed that experts have backed global sectors such as banking and finance, insurance, healthcare, supply-chain, among others, to reap benefits out of stablecoins and CBDCs’ use cases. Reportedly, Jeremy Allaire, founder, Circle, a digital currency firm, has emphasised that private sector products such as stablecoin USDC can live up to the role of a CBDC but both could also coexist if required.
Moreover, predictions indicate that 2023 will show benefits and limitations of CBDCs with respect to stablecoins. As per a survey by Bank of International Settlements (BIS), a financial institution, 90% of central banks have started to explore CBDC-based applications, and 65% of central banks are expected to develop a retail CBDC in the future.
“In the future, it is likely that stablecoins and CBDCs will coexist and complement each other in a variety of ways. I believe the use of stablecoins will become widespread as financial institutions and other major players in the industry embrace the technology,” Vipin Vindal, CEO, Quarks Technosoft, a software company, noted.