The popularization of digital currencies has been the foundation and cause for various emergence of concepts, including central bank digital currencies (CBDC) and Stablecoins. While both concepts share many similarities, there are distinct differences that contribute an important role towards the functionality of CBDC and Stablecoins. This article will emphasize conducting a comparison of the two digital currencies, exploring the benefits and challenges, and ultimately exploring the potential collaboration between CBDC and Stablecoin.

Definition

Central Bank Digital Currency (CBDC)

The CBDC is a variation within the digital currencies and it is issued by the central banks. The value of the CBDC is considered to have a 1:1 ratio with the standard currency of the particular country. With CBDC acting as the digital representation of the country’s official currency, the value of the digital currency is tied to the fiat currency. 

Stablecoins 

Stablecoins are another variation in the group of digital currencies, and it is issued by private companies and organizations. The purpose of digital currencies is to minimize the volatility that currently exists in cryptocurrency. By pegging the Stablecoins with a specific asset such as a commodity, currency, or cryptocurrency, or utilizing an algorithmic mechanism, the digital potentially minimizes the volatility, creating a safer experience for the users.  

Benefits and Challenges 

Central Bank Digital Currency (CBDC) 

A key feature that differentiates the CBDC from the standard cryptocurrency is the controller and the issuer of the currency. The central banks regulate and manage the CBDC, which increases the credibility of the currency. Since the CBDC’s value is linked with the official currency of the country, the digital currency is also considered to be legal tender. One of the digital currency’s potential is to erase the intermediary role to process the transactions, this simplifies the transaction process between individuals and businesses. For locations that lack financial and bank services, the CBDC could act as a bridge to connect services to such locations. 

It is important to acknowledge the present stage of CBDC, as the currency is considered to be in the developing stages, the technology itself requires additional time for development, as there have been cases of technical issues such as the DCash. Security is also one of the main concerns for digital currency, as cryptocurrency has shown to be an incentive for hackers to take action since the technology is considered to be modern. 

Stablecoins

One of the main purposes of Stablecoin is to offer stability in cryptocurrency. By having stability in the digital currency, users could hold the digital money without the present volatility existing in cryptocurrencies. Stablecoins can either operate in a centralized or decentralized manner, with the decentralized side, this could result in enabling users to make international transactions more efficient, faster, and simpler. And similar to the CBDC, Stablecoin could promote financial inclusiveness with its features. Stablecoin can differentiate itself from the CBDC like the digital currency, while CBDC offers the credibility of the central bank as the backing of the currency, Stablecoins are pegged to a particular asset, ultimately reducing the volatility of the digital currency.

While Stablecoins might solve the problem of volatility of their own, the volatility of the pegged asset, especially cryptocurrencies, might be exposed to price fluctuations. This might result in Stablecoin losing its value, since the specific pegged cryptocurrency is declining in value, ultimately affecting the holders. 

Potential For Collaboration?

While the two digital currencies have similarities and differences, potential for future collaboration between the two might exist. One of the main issues regarding Stablecoins is the absence of regulations, such absence of regulation could be dangerous for private entities as future regulations might hinder their operation. The CBDC is issued and managed by the central bank, resulting in oversight by the central bank. It could be possible for the two digital currencies to collaborate to make use of the advantage of technological expertise from Stablecoins and regulations oversight from CBDC.

The potential mentioned above does not necessarily indicate the future, but rather a prediction of a case that might occur in the future. 

References

Central bank digital currency and stablecoin: Early coexistence on an uncertain road. (2021, October 11). McKinsey. https://www.mckinsey.com/industries/financial-services/our-insights/cbdc-and-stablecoins-early-coexistence-on-an-uncertain-road

Dowsett, C. (2023, February 3). What Are Stablecoins? (Definition, How They Work, Types). Built In. 

 https://builtin.com/cryptocurrency/stablecoins

Explained: Stablecoins Vs Cbdcs — Similarities And Differences. (2022, September 15). CNBCTV18. https://www.cnbctv18.com/cryptocurrency/explained-stablecoins-vs-cbdcs--similarities-and-differences-14724621.htm

What Is a Central Bank Digital Currency (CBDC)? (2023, April 18). Investopedia. https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp#toc-goals-of-cbdcs

What is CBDC (Central Bank Digital Currency)? (2023, March 1). McKinsey. Retrieved May 22, 2023, from https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-central-bank-digital-currency-cbdc