Stablecoins should be programmable to resist central bank digital currencies (CBDC)
Could stablecoins coexist with CBDCs? Regarding providing enduring value, Stablecoins and CBDCs are two sides of the same coin. However, Stablecoins can give different use cases, and CBDCs, simply put, cannot compete with them.
Notably, the key is coding: The Smart Contracts that automate and add new functions to money. Programming enables asset backing and decentralization, which is impossible with current CBDC designs. Developers should take advantage of the programmable opportunities offered by Stablecoins rather than trying to compete with CBDCs.
What are CBDCs?
They stand for Central Bank Digital Currency. The Bank of Spain defines CBDCs as “a new form of money issued electronically by a central bank.” Unlike decentralized cryptocurrencies, in this case, we have a digital currency where a central bank can monitor each transaction.
“After the rise of Cryptocurrencies, there was no choice but to replicate their operation in a centralized way.”Bank of Spain
By the way, the best-known example is the e-Yuan, a true innovator in this field. Although we also have the digital euro or yen, projects that need to be completed, the various central banks have been working for years on their creation. Analysts at the New York Stock Exchange consider digital currencies issued by central banks to be a “natural evolution” of the current monetary and payment systems.
What are stablecoins
Effectively, they are a type of digital asset whose price is linked to that of another asset through a parity relationship. The most famous cases maintain a 1-to-1 relationship with the U.S. dollar, while others are paired with gold or other assets.
So, the primary motivation for creating a Stablecoin is to shelter investors during volatility and market turbulence. Stablecoins are linked to a fiat currency, while CBDCs are fiat currencies, although created on a Blockchain. Private companies issue stablecoins, while CBDCs can only be issued by Central Banks linked to national governments.
As an essential fact, the deputy director of the International Monetary Fund, Bo Li, has explained that more than 30 countries are already immersed in creating these digital currencies, in what he describes as “an unprecedented worldwide interest.”
Stablecoins must be truly programmable to resist CBDCs
In particular, Bank of America points out that CBDCs and Stablecoins are the organic evolution of cash and payments. Analysts at the U.S. bank described them as “potentially the most significant technological breakthrough in the history of money.”
However, the issuers of Stablecoins say that they can improve the current monetary system in different ways:
- Stablecoins can reduce the costs of traditional financial activity.
- People in countries experiencing hyperinflation use Stablecoins to protect their income and stabilize payments.
- You can use stablecoins for more privacy-oriented transactions.
In itself, these purposes for Stablecoins fall within the framework of the current financial system. The drawbacks that Stablecoins address could also be solved, in theory, with CBDCs.
Kolektivo, for example, plans to allow local communities to create, launch, finance, and govern their own economies. Similarly, Grassroots Economics uses Community Inclusion Coins in Kenya, backed by the pooling of local products and services and donor funds in money and coupons.
Programmability through decentralization
Decentralization also fosters greater coding opportunities. Users decide and control the execution of programmable money. In turn, it can give greater power to Stablecoins holders, promoting transparency in issuance and management and developing new functions driven by user needs.
Stablecoins do not compete with CBDCs since their function is entirely different. This quote from Alkhesh Shah: “CBDCs don’t change the definition of money, but they will probably change how and when we’ll transfer value in the next 15 years.”