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Can Stablecoins & CBDCs Coexist?

The introduction of retail and wholesale CBDCs begs the question of whether privately-issued stablecoins, which have been touted as an alternative form of “money” in everyday transactions and a more cost-effective cross-border payment system, will be able coexist with CBDCs issued by central banks.

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The emergence of stablecoins have coincided with urgent efforts from central banks to explore the concept of central bank digital currencies (CBDCs).

According to the Bank of International Settlements (BIS), approximately 80% of the world’s central banks are currently engaged in pilots or other CBDC activities. However, developments remain slow as compared to the stablecoins sector, with only 11 countries having fully launched a CBDC.

“Most CBDC projects are experimental, abstract, or non-existent, whereas the issuance of and operation of payment stablecoins like USDC have already touched trillions of dollars in economic activity and are finding regulatory homes like we’ve done here in Singapore,” Dante Disparte, chief strategy officer and head of global policy for Circle, told Blockhead on the sidelines of Singapore Fintech Festival.

“In 2023, you can expect this to become a breakthrough innovation that starts to enjoy everyday use for people all over the world,” he added.

Read more: Talking Heads: Circle’s Foray Into the Region & Singapore Crypto License

How will stablecoins and CBDCs coexist?

The introduction of retail and wholesale CBDCs begs the question of whether privately-issued stablecoins, which have been touted as an alternative form of “money” in everyday transactions and a more cost-effective cross-border payment system, will be able coexist with CBDCs issued by central banks.

Amit Ghosh, chief information & services officer and head of APAC at enterprise technology and services firm R3, believes that there will be a heterogenous landscape of digital currencies in which stablecoins and CBDCs issued by regulated financial institutions will coexist “harmoniously.”

However, the issue that will arise is the fragmentation across different markets due to CBDCs and stablecoins possibly operating within siloed ecosystems, which means that interoperability is key to the coexistence of CBDCs and stablecoins.

Read more: Is Web3 Ready for Interoperability?

“Cross-network interoperability will be critical to their [stablecoins and CBDCs] coexistence and be extremely fundamental to achieving inclusivity in financial markets. At R3, we have been ramping up our investment in interoperability capabilities over the last year. This is driven by a much clearer playing field of options for DLT platforms that are fit for purpose for regulated markets, allowing for better focus on which ecosystems ‘bridges’ to invest in,” Ghosh told Blockhead.

While both CBDCs and stablecoins have the potential to promote financial inclusion (CBDCs can be issued by a central bank directly to the population without going through traditional bank accounts), they’re in essence, two very different products.

At present, stablecoins are a crucial facilitator of DeFi (decentralised finance) activities, and are mostly used for trading, lending and borrowing crypto assets. On the other hand, CBDCs represent the digitization of bank notes, and according to some governments, can even be “programmable”, making them vehicles that can restrict spending or have an expiration date.

Speaking on a panel about the future of stablecoins along with Paxos co-founder Richmond Teo at Singapore Fintech Festival, Binance CEO Changpeng Zhao (CZ) said that contrary to popular belief, CBDCs, stablecoins, and native cryptocurrencies like BTC and ETH “don’t really overlap.”

“Many people who are not in the industry think cryptocurrency is one thing, thinking that central bank digital currencies will just replace everything. That’s not how it works. When there’s a new internet company, it doesn’t erase all the other internet companies, it’s just a new use case”, Zhao said, adding that bitcoin and stablecoins are “much smoother” and CBDCs will require a lot more permissions from a centralised institution.

Read more: Does Singapore Need a Retail CBDC? MAS Says No But Commences Trials

For Aymeric Salley, co-creator and head of StraitsX, different digital currencies offer different features, and hence there will be unique applications for each type of currency.

“You’re most probably not going to use CBDCs if your goal is micropayment, as compared to large wholesale remittances. Similarly, the distinction between domestic and cross-border, or B2B and B2C, will justify the recourse to different types of digital currencies,” Salley told Blockhead

Privacy & security

There are several challenges that CBDCs will present, including the disintermediation of banks and cybersecurity risks. However, the largest obstacle to the adoption of CBDCs is arguably privacy concerns, or how governments have to balance the increased transparency in money flows with the financial privacy of the population.

According to Rahul Advani, APAC policy director at Ripple, retail CBDCs are currently “no different” from the existing banking system, as they also follow a two-tier system where distribution is by private sector institutions.

This means that just like the banking system, transaction information from CBDCs can also be passed on to authorities if sufficient cause is shown through a legal process. However, there are also a number of solutions that can potentially mitigate privacy and security risks.

“One such example is zero-knowledge proofs, that can prove that someone owns the CBDC without exposing the details of their identity data. However, zero knowledge proofs are resource intensive, and might be difficult to scale at the transaction volumes expected with a CBDC,” Advani told Blockhead.

Advani also noted that most countries have a comprehensive framework of legal and regulatory measures that can balance the privacy rights of individuals with the legitimate needs for transparency for the authorities.

“In countries that do not have such frameworks and where there is a more restrictive view to privacy, a retail CBDC could have privacy and security concerns. This is an inherent feature of the political and judicial system of the country – not the CBDC,” he explained.