Digital payments through stablecoins and digital assets are gathering pace but are unlikely to replace central bank money, a new report by credit ratings giant Moody’s says. Speaking to CoinGeek, Vincent Gusdorf, one of the authors of the report, says that users are most concerned with trust, an area where central banks have a big lead.
The report delved into the rise of digital payments, including digital assets, stablecoins, and mobile money, and their impact on the payments sector. Moody’s says that new payment solutions will support, rather than supplant, commercial bank money.
Digital payments will most likely succeed if they solve some of the challenges associated with commercial bank money, says Vincent, the Senior Vice President for DeFi and Digital Asset Analysis at Moody’s.
Digital assets are unlikely to overtake central bank money in payments mainly due to their volatility, Gusdorf tells CoinGeek.
“We see some potential in crypto, but they will not become as popular as CBDCs or commercial bank money,” he noted.
Digital asset use for payments will also depend on jurisdictions, he added. In developing countries where commercial bank services are not always available or are very costly, digital assets have great potential. Developed countries are unlikely to tap into digital assets as they already have access to cheap, fast, regulated, and stable payment systems.
There is data to support this claim. Of the top 20 countries for digital asset adoption, according to Chainalysis, only the U.S. and the U.K. are in North America or Europe. The rest are in Asia, Africa, and South America.
What about CBDCs and not-so-stablecoins?
While digital currencies miss out as payment methods due to volatility, can stablecoins do any better?
According to Gusdorf, stablecoins have failed to live up to their “stable” promise. The collapse of Terra’s UST and the depegging of USDC and other top stablecoins (and let’s not even mention Tether’s legal issues) have sapped the trust users had in stablecoins.
Moody’s report further illustrated the struggles that top stablecoins had faced recently. “Neither Tether nor USD Coin, the two largest fiat-backed stablecoins, have been able to maintain their peg to the dollar continuously in recent years,” the report read.
CBDCs stand a better chance at becoming popular payment methods and “will be perceived as the safest form of digital money,” the report said. They could boost financial inclusion, ease cross-border transfers and encourage financial innovation.
The biggest challenge for a CBDC rollout remains commercial bank disintermediation and privacy concerns. In the U.S., some, like Florida Governor Ron DeSantis, have cited these concerns as they stood their ground against a digital dollar. In Europe, banks in Germany, Italy, and other countries have expressed concerns over a digital euro driving them out of business.
The report dismissed these concerns, saying a CBDC is unlikely to bring about disintermediation. According to Gusdorf, no central bank will have any motivation to drive commercial banks out of business. As such, central banks will design their CBDCs to protect the banks and ensure they continue to get customer deposits.
With the digital euro, one of the proposed solutions has been a cap on how much CBDC you can hold in your digital wallet; the proposed limit has been between €3,000 ($3,312) and €4,000 ($4,416). Another proposal has been to offer very little or zero interest payments on the digital euro, incentivizing users to hold their deposits at a commercial bank.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: Bernhard Müller talks Centi’s first stablecoin on BSV backed by Swiss bank
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