CBDCs vs Stablecoins
In which we discuss different ways to process money on chain.
Stable Sis
5/27/20263 min read
ECB's president Christine Lagarde recently made headlines by saying that "The case for promoting euro-denominated stablecoins is far weaker than it appears" (source). This came in response to a paper by the Bruegel's think tank asking for a regulation change that would put EUR denominated stablecoins on a level playing field with their USD denominated counterpart. At the same time, Qivalis announced that the number of banks joining them has risen to 37, with heavyweights like BNP and Nordea now onboard as well.
Is this another public vs private clash? Yes, and this is one for the ages. It involves technology, economics and philosophy and it will shape the future of finance in the European Union. In the same meeting, president Lagarde also made it clear that when it comes to blockchain, the answer is CBDC, and not stablecoins.
CBDC stands for Central Bank Digital Currency. The easiest way to think about it is as a bank account with your central bank, which is your national central bank or the ECB if your country has adopted the Euro. In this account you do not hold physical cash, but digital money. With digital money in this case we mean a token on the blockchain, with absolutely no physical counterpart. In the same way the ECB prints coins and banknotes today, in the future they will instead issue tokens which individuals and corporations will hold in their wallets.
This is economics as we know it today, except that now it's on chain. Nothing changes but for the decommissioning of the printing press. Except that something does change.
Privacy and control
Every transaction on the chain is visible, from wallet to wallet. Now that digital identities are fairly common things, it is reasonable to assume that in order to get a digital wallet you will have to pair it with your digital identity. Once you do that, every single transaction you make is instantly available to your national bank or the ECB. Whether this thought alone makes you shiver depends on where you are in the world. There are of course advantages to this setup: social benefits can be transferred quickly, VAT reimbursements become instantaneous. However, freezing your assets because of an admin error is now also instantaneous.
Stablecoins' proposition is different. The tokens are issued by private parties (corporations, financial institutions, even individuals), since they do not have the might of the state behind them, they need to be backed 1:1 by high quality reserves. Since they are issued by private parties, they are also at arm's length from the government. Of course, that does not mean stablecoins cannot be touched in case, for example, of sanction evasion. But an enforcement action would have to go through the same channels as an order to freeze an account does today.
To centralize or not to centralize?
There is a second point worth exploring in the CBDC vs stablecoin debate. The question of the single point of failure. In a world where everyone has an account with the central bank and all their money is there, what happens when that ledger goes down? It is not very often that a state cannot print money because of a technical issue. The most recent case is Zimbabwe in 2009, which is hardly a case one can generalise from. However, we are in uncharted territories and it pays to speculate. What do we do when all of our money is in CBDCs but we cannot touch it because of a DDoS? Or if a government defaults on its debt and a clause triggers the use of the money in the CBCDs to satisfy its creditors?
Here again stablecoins offer a different approach. It is definitely true that a stablecoin issuer is a lot more likely to default than the government ever is. Collapses have happened and have indeed been painful. But as long as several stablecoins from different issuers are in circulation, one could argue it is simply a case of not putting all of one's eggs in one basket. If we squint our eyes just enough we can almost see a future in which a stablecoin issuer failing is treated in the same case as a financial institution failing nowadays and therefore token holders would be protected. However, providing this kind of insurance, is one of the policy Bruegel proposed in its paper and the ECB flat out rejected.
What about banks?
This probably merits a discussion in and of its own. As the Qivalis case proves, in Europe financial institutions are embracing stablecoins. In the US of course, they have gone all in. Support for CBCDs is however mixed. Adoption of the digital euro has not been made easier by the short term vs long term Pontes/Appia framework. Project Agora is now underway in the US, as a wholesale project only, after fierce opposition from commercial banks to retail CBDCs.
Final thoughts
Rather than an either/or, the solution might lie in an and/and situation. Or in the realisation that stablecoins have their uses and so do CBDCs and the two do not necessarily need to compete. This requires imagination, willingness to cooperate and a separate post.
Until next time,
Stable Sis