CBDCs will meet local needs, but international cooperation could support and facilitate the widespread adoption of readily available stablecoins.
Since the inception of the Bitcoin network more than 14 years ago, central banks all around the world have observed how blockchain technology has produced extremely secure, irreversible, verifiable, and transparent financial ecosystems. Central bank digital currencies (CBDCs) were one of the ways that fiat money may use cryptocurrencies to fulfill some of their current goals.
98 of the 195 nations, or over 95% of the world's GDP, have either already launched their own CBDCs or are working to do so in order to keep up with rising inflation, reduce operating expenses, and address money laundering and related issues.
The value of the stablecoin ecosystem, or cryptocurrencies backed 1:1 with fiat, like the US dollar, is called into doubt as CBDCs enter the race to rule the future of finance.
Once CBDCs are in Circulation, How Useful Will Stablecoins Be?
The Bank for International Settlements (BIS) defines CBDCs as falling into one of two groups based on their users and purposes:
Wholesale CBDC: Often distributed to commercial banks and other significant financial institutions for the settlement of high-value payments.
The wholesale CBDC is subject to a relatively developed regulatory regime and is easier to supervise with big sums of money thanks to blockchain technology's improved liquidation efficiency. However, it also has drawbacks like limited case usage (only suitable for participants like large companies).
Retail CBDC: It is primarily distributed to individuals and businesses and is frequently used as a cash substitute in minor retail transactions. With a variety of use cases, this sort of CBDC also improves payment convenience and social welfare. However, managing it is challenging and complex. The computing power of blockchain technology is challenged by the high demand for transactions per second.
In general, wholesale and retail CBDCs work well together. At various phases of their own growth, the central banks of different nations have varying requirements for CBDCs. Therefore, depending on the state of the local market, different strategies and methods are used to build CBDCs. In the BIS data poll, it was found that out of the 66 central banks that took part, 15% are focusing on wholesale CBDC, 32% are researching retail CBDC, and the remaining ones are embracing both.
Depending on how tight stablecoin restrictions are and how widely CBDCs are adopted, stablecoins and CBDCs may coexist in some form in the future.
What Effects Has the Recent USDT Price Fluctuation Had on the Ecosystem of Stablecoins?
Basically, Tether fluctuates every now and then, mostly because of worries about the opaqueness of USDT's collateral (which isn't entirely backed by fiat USD) and FUD sentiment brought on by scandals and business failures.
Because of the mistrust and dangers associated with USDT's secrecy, USD Coin has grown significantly since 2021, and its market share has gone from 20% to 30.5%. However, users also have certain worries regarding USDC because of things like the United States' long-arm jurisdiction.
Native overcollateralized stablecoins with blockchain decentralization ethos, like Dai, the forthcoming Curve DAO Token USD (crvUSD), and Aave's GHO (GHO), may also have the potential to become widely used stablecoins in the future.
How Much Influence Over Their Crypto Ecosystems Should Business Owners Have?
In some ways, it's advantageous for wise and powerful businesspeople to have more control over their cryptocurrency ecosystems in the beginning because strong leadership will promote the growth of the organization and its ecosystem. However, in order to ensure the security and transparency of the users' assets as they are stored on the platform, tight guidelines for internal risk control, asset classification and custody isolation, and private key wallet multi-signature management regulations must be established.
Some Governments Have Opted to Utilize Their Own Currencies For Cross-border Payments Amid Geopolitical Unrest. Will This Trend Stay the Same? Will the General Population Share This Opinion? If at All, How Will it Affect the Stablecoin Ecosystem?
The majority of CBDCs have centralized management, configurable anonymity, and privacy protection features. There are no significant changes or effects to the reserve proof of the encryption system under this type of scheme, and the stablecoins continue to be supervised by the CBDC's system.
Stablecoins under this kind of system will be more open and transparent, and some CBDCs with better decentralization and interoperability will have higher compatibility for diverse encryption ecologies. Using a platform for distributed ledger technology, the Bank for International Settlements and four central banks carried out the cross-border payments project known as Project mBridge this year. The BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the People's Bank of China's Digital Currency Institute, and the Central Bank of the United Arab Emirates all participated in the trial.
What Will it Mean For Stablecoins Backed by CBDC? Will it Support Efforts to Implement Proof-of-Reserve in Crypto Ecosystems?
The influence of conventional banks may be diminished by CBDCs, with stablecoins and the cryptocurrency ecosystem also having an impact. The widespread adoption of stablecoins will, in my opinion, be facilitated and supported by increased international cooperation and more mainstream national regulatory regimes.
What Key Qualities Should CBDCs Possess?
More CBDCs with a set number of nodes are something I'd want to see, so that their information transfer is less dependent on a single institution (such as the central bank). Additionally, I'd want to see several CBDCs with strong technological interoperability. These are all positive traits that would improve CBDC's compatibility with the blockchain environment.
Although CBDCs aren't seen as cryptocurrencies' direct rivals, they do share several characteristics with them that aid in solving issues in the current fiat economy. Given the track record most recently set by FTX CEO Sam Bankman-Fried, investors feel more secure when investing with the support of central banks than when relying on independent businesspeople.
Disclaimer: The author's personal view may be included in the information, which is subject to market conditions. Before making a cryptocurrency investment, do some market research. Your individual financial loss is not the responsibility of the author or the publisher.