Main Points of the Article

• Many Countries are thinking to bring the Central Bank Digital Currencies (CBDCs). This article will explain you about Major Differences between CBDCs, Cryptocurrencies and Stablecoins.
• Some may know about Cryptocurrencies, but, not of CBDCs. The main differences is CBDCs is issued and backed by a Central Bank, which gives insurances/guaranteed protection to the Depositors/ consumers money. Whereas Cryptocurrencies and Stablecoins are not backed by any bank or government authorities.

Introduction

These days many economies/ countries have started issuing or say bringing Central Bank Digital Currencies (CBDCs). According to CBDC Tracker 22 countries are proof of concept for CBDCs. Today almost 60 percent of economies are exploring the adoption of CBDCs.

In this article we are going to look at the differences between CBDCs, Cryptocurrencies and Stablecoins.

Main Differences between CBDCs, Cryptocurrencies and Stablecoins

CBDCs:

As the name defines CBDCs is issued by Central Bank, which gives guarantees protection for the Depositors money. In simple CBDCs is electronic cash (or say digital money). Just as paper/normal cash in CBDCs the direct liability is on Central Bank. This actually makes depositors money safer – as this is issued by the Central Bank – than the digital money issued by the commercial bank.

According to Bank for International Settlements (BIS) Report on Central bank digital currencies: foundational principles and core features states the CBDCs principles which emphasises that i) by issuing CBDCs a central bank should not compromise financial or monetary stability; ii) It should complement and coexist with existing forms of money; iii) It should promote efficiency and innovation.

BIS stated in its Report that “International use of CBDCs could potentially increase cross-border flows, but specific design choices of CBDCs could limit such use.”

One of the main concern of Central Banks on the possible adverse effect of a CBDCs is potential risk of destabilising runs into central bank money.

International Monetary Fund (IMF) Chief, Ms. Kristalina Georgieva (MD), in Key Note Address of Singapore Fintech Festival held on 15^th November 2023, stated that “CBDCs can replace cash which is costly to distribute in island economies. They can offer resilience in more advanced economies. And they can improve financial inclusion where few hold bank accounts.” CBDC can be low cost alternative even for cross-border transactions.

Cryptocurrencies:

Cryptocurrencies is not a Legal Tender. The Cryptocurrencies are not issued by the Governments or banks or any other financial institutions. It is a digital currencies exchanged between people and various entities on a decentralized system. Cryptocurrencies are not backed up by the Central Bank or Government Authorities. It is not protected from fluctuations in prices, hacking or when firm collapses. Cryptocurrencies is treated as assets rather than currency.

According to Moneyecon “Cryptocurrency payments are validated using certain protocols. The first cryptocurrency was invented in 2008, called Bitcoin, & since then, cryptocurrencies have thrived.”

Cryptocurrencies transactions are faster than traditional payment method and it is completed in a matter of seconds. It is much more secure and safe. It records all transactions in an immutable blockchain which makes it impossible for hackers to alter or delete the data. Lower fees are charged for using cryptocurrencies as there are no intermediaries like banks or payment process required for the transaction.

Stablecoins:

Stablecoins are also form of cryptocurrency. As the name denotes it is designed to be more stable in value by having their value tied to another asset. It is pegged with real world asset like US dollars, crypto assets or commodities or any algorithms. Even stablecoins are not backed by any central bank or Government authorities. Its main role is provide means of payments within the digital ecosystem. Over 80 percent of trade volume involves stablecoins as part of the traded pair which shows that it acts as a role of medium-of-exchange.

It uses variety of stabilisation mechanisms. There are three main stabilisation mechanism they are: off-chain collateralization, on-chain collateralization, and algorithmic. It is important to understand a stablecoins particular mechanism to identify the potential risk of a run on the stablecoin in times of stress or uncertainties.  

Conclusion – My Perception

The evolution of technology plays a vital role in all these currencies. The effectiveness of CBDCs are entirely depends on how the Central banks implements and how it handles it. The policy decisions plays a vital role for the success of CBDCs. No one can stop the evolution of currencies as the technology will keep evolving over the years. Therefore, the central bank should adapt themselves with the evolving technology.