What role will CBDCs and stablecoins play in the future financial systems?

What role will CBDCs and stablecoins play in the future financial systems?

Can stablecoins and central bank digital currencies (CBDCs) co-exist in the future, or will it be either-or? Do blockchain protocols actually matter in terms of the worldwide adoption of digital currencies? And what are some of the concerns related to these technologies? These topics were discussed in the “Banking Unblockchained?” webinar hosted by the Polish Blockchain Association earlier today, featuring Tokenized CEO James Belding and nChain Director of Commercial and Strategy Simit Naik.

Also joining the discussion were moderator Marcin Rzetecki and Vodafone’s blockchain lead David Palmer, who has been looking at ways blockchain technology can integrate with mobile devices via SIM cards.

The main question in the webinar was whether blockchain tech could offer benefits for cross-border payments in terms of cost and speed/efficiency. All participants agreed it certainly could.

“We have to understand why these payments are so expensive now,” Naik said, arguing that it was mainly due to overhead costs at the various intermediaries involved in the processes. While blockchain wouldn’t necessarily eliminate those intermediaries, it would certainly reduce them by automating them. “This changes the way the economy works,” he added.

Belding agreed that there were currently “too many silos, too many sources of truth” and that blockchain could be “the endgame for clearing settlement” that could, in turn, create economies of scale as we’ve never seen before.

Vodafone’s Palmer focused more on adoption, such as getting the necessary technology into everyone’s hands. He said that a workable digital ID system would be key to this, and he prefers to talk about applications rather than have debates over which blockchain protocol is best.

About CBDCs and stablecoins

The discussion then shifted to its main focus: the role of CBDCs and stablecoins in a future digital economy. CBDCs have been talked about so much that they’re almost an inevitability, but their advent is also marked by concerns over freedom and privacy, and how governments and central banks would exercise control over their use.

Would they be simply a digital version of the fiat currencies we use today, with almost no recognizable difference to consumer users? And while mobile technology is widespread, it doesn’t reach every single person on earth. So how could they guarantee financial inclusion? Are CBDCs a trap?

One issue with CBDCs, and discussing them is that we don’t have any real-world CBDCs yet. As Belding said, their usefulness and/or threat to freedoms will depend greatly on local policies, and the experience could vary from jurisdiction to jurisdiction.

As for stablecoins, it’s not certain whether any current offerings exist in their ultimate form either. We’ve seen widely-adopted but legally questionable offerings like Tether/USDT, and disastrous attempts at “algorithmic stablecoins” like TerraLuna.

With that in mind, much of the conversation surrounding these technologies is hypothetical and speculative.

Palmer suggested that CBDCs (if modeled on today’s fiats) don’t automatically solve problems like quantitative easing and inflation. Also, there would be privacy concerns if daily-use currencies were digitally linked to individual IDs.

Belding said he doesn’t see CBDCs as “a trap” per se, but believes different jurisdictions would exercise different levels of control over their use and how private they would be. Stablecoins will continue to exist, but “they won’t be called stablecoins,” he added, saying there would be numerous digital debt instruments people could hold in place of today’s interest-bearing bank accounts—instruments that could be easily swapped for a national CBDC when needed. Trust in how the issuer of a stablecoin manages real asset reserves, and “there will be marketing on all sides” to win that trust.

Naik also said that privately-issued stablecoins might be a better option for the general public, so long as they’re properly backed by real assets. Today’s stablecoins, he said, aren’t really designed for spending, and there isn’t much existing infrastructure for that. They’re mainly used to park value for exchange traders.

“If we just copy legacy systems we’ll make all the same mistakes,” Naik said.

The group also discussed whether regulation was hindering blockchain adoption and whether stablecoins could be “attacked” in the future (presumably by either a bad actor, or a government who saw a particular asset as a sovereign threat).

As with many of the above points, the answers were mainly of the “time will tell” variety. We haven’t seen how governments will handle CBDCs yet or balance ID, privacy, or usage limitations—and indeed, the relationship between governments, central banks, and the way they issue currencies already varies. Though some companies (such as nChain) are examining the idea of using the BSV blockchain as the base platform for issuing CBDCs, it’s also uncertain whether governments will ultimately choose to use a blockchain at all.

BSV’s blockchain definitely has the most attractive technology to provide a universal source of truth that would eliminate silos and create interoperability between any services that use it. But many more people still need to be educated and convinced before currency-issuing authorities choose the best option.

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.

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