Stablecoins and central bank digital currencies (CBDCs) are here to stay, and in order to create the best possible cryptoassets, participants and advocates of both will have to work together.
Cryptoassets continue to develop and evolve rapidly, and a question that needs to be addressed is whether or not the different versions of crypto can coexist. Specifically, the continued rise of stablecoins – a market and asset class now worth tens of billions of dollars – has in turn spurred the development and maturation of CBDCs. In essence, 2020 has seen a competitive landscape develop, with both the private sector and governmental sector involved in the issuance of a variety of crypto-fiat hybrids.
A question that needs to be answered, given this context and backdrop, is whether or not there is enough room for both privately issued stablecoins and CBDCs going forward?
While superficially very similar to each other, one important distinction must be made from the beginning; the only institution that is legally capable of issuing currency at the nation-state level remains governmental agencies or actors. Ever since the bitcoin price bubble burst at the end of 2017, there has been increasing involvement by governmental and regulatory agencies in the blockchain and cryptoasset space. Given that, it seems reasonable to ask as to whether or not the current diversified cryptoasset landscape will continue to thrive and exist moving forward.
Let’s take a look at some of the reasons why there will be plenty of room for both stablecoins and CBDCs, and why it is important to have a regulatory and business environment that fosters both.
Stablecoins helped develop CBDCs. One facet of the stablecoin conversation is that, at a very fundamental level, stablecoins did in fact help lead to the development of CBDCs. For example, the original Libra Association white paper and several of the CBDC projects that have been implemented appear to have quite a few similarities from an operational perspective. Even more importantly, the entire idea of a stablecoin made the idea of centrally issued cryptoasset tangible and realistic in the marketplace.
MORE FOR YOU
To keep developing, and evolving into easy-to-use options, it makes sense that stablecoins will continue to play an important role in the further development of CBDCs.
CBDCs are money. Something that can easily be overlooked in the fast moving and rapidly changing cryptoasset conversation is that while cryptocurrencies (including stablecoins) are still dealing with regulatory ambiguity, CBDCs do not have to contend with these issues. Since, by default, a CBDC is issued and managed by a government or governmental agency it makes sense that it will be treated as an equivalent to existing fiat currency.
That certainly will help address and resolve, potentially, many of the accounting and reporting issues that exist for other cryptocurrencies, but also creates an opportunity for private sector actors. Specifically, it would be illogical to assume that governmental actors or agencies will be able to develop, implement, and maintain a CBDC network without private sector partners.
In other words, by collaborating with governmental actors, private issuers of stablecoins will be able to improve existing offers as well as develop new ones.
Competition is essential. Regardless of the sector being examined, the importance of competition and competitive forces are difficult to overstate. Especially in an area that is as fast moving and rapidly developing as blockchain and cryptoassets, there are invariably going to be bumps in the road, and that is exactly why having both privately issued stablecoins and CBDCs is so important. No single issuer – private sector or governmental sector – will have a monopoly on answers or good ideas, and to arrive at the best possible iteration will require input from all participants.
Framed in that context, there is the potential for a virtuous cycle to be established in which private sector innovations and developments linked to stablecoins create better and more market oriented CBDCs.
There is no way to accurately predict just how the cryptoasset space will continue to develop and evolve, especially once politics and macroeconomic factors become integrated into the conversation. That said, and taking into account that market participants are going to want the best product possible, it does seem to make sense that there will be some sort of private-public-partnership that drives the wider ecosystem forward.
Cryptoassets are evolving quickly, with stablecoins and CBDCs leading the conversation as 2020 turns into 2021. To most effectively capture the benefits of these developments, however, all participants will need to participate in the conversation. This requirement, and expectation, will continue to drive the further development, expansion, and refinement of the cryptoasset going forward.
Stablecoins and CBDCs are here to stay, and in order to create the best possible versions, participants and advocates of both will have to work together.