Stablecoins must be programmable to resist central bank digital currencies (CBDCs).
When it comes to providing stable value, stablecoins, and CBDCs seem to serve as two sides of the same coin. However, stablecoins can provide completely different use cases, and CBDCs simply cannot compete.
Particularly, the key is programmability through Smart Contracts that automate and add new functions to money. Programmability allows for asset backing as well as decentralization which is not possible with current CBDC designs. Developers should take advantage of the programmable opportunities that stablecoins offer, instead of trying to compete with CBDCs.
What are CBDCs?
They are the acronym for Central Bank Digital Currency. As described by the Bank of Spain: “it is a new form of money issued electronically by a central bank.” Unlike cryptocurrencies, which are decentralized, in this case, it is a digital currency where each transaction is monitored by a central bank.
The best-known example is the e-Yuan, a true pioneer in this field. Although we also have the digital euro or digital yen, which although they have not yet materialized, the different central banks have been working on its creation for years.
In fact, analysts at the New York Stock Exchange consider central bank-issued digital currencies to be a “natural evolution” of current monetary and payment systems.
Stablecoins
They are a type of digital asset whose price is linked to that of another asset through a parity relationship. The most popular cases have a 1 to 1 relationship with the US dollar, while others are paired with gold or other assets. Thus, the main motivation to create a stablecoin is to try to give investors refuge in times of volatility.
Stablecoins are linked to a fiat currency, while CBDCs are fiat currencies themselves, although created on a Blockchain. Stablecoins are issued by private companies, while CBDCs can only be issued by Central Banks, linked to national governments.
The deputy director of the International Monetary Fund, Bo Li, has explained that more than 30 countries are already immersed in the creation of these digital currencies, in what he describes as “unprecedented worldwide interest.”
Stablecoins Must Be Truly Programmable to Resist CBDCs
In particular, Bank of America points out that both CBDCs and Stablecoins are the natural evolution of money and payments. Analysts from the US bank described them as “potentially the most significant technological advance in the history of money.”
In this sense, the issuers of the Stablecoins express that they can improve the current monetary system in different ways such as those described below.
First, stablecoins can help reduce the costs of traditional financial activity.
Second, people in countries experiencing hyperinflation use stablecoins as a means to protect their income and stabilize payments.
Finally, stablecoins can be used for more privacy-oriented payments.
These purposes for stablecoins fall within the framework of the current financial system. Consequently, it should be noted that the problems that stablecoins address could also be solved, in theory, with CBDCs.
Decentralization also fosters greater programmability. Users determine and govern the execution of programmable money. In turn, it can give greater power to stablecoin holders, fostering transparency in issuance and management, as well as the development of new features driven by user needs.
Finally, stablecoins are not predestined to compete with CBDCs but function as something completely different.
By Audy Castaneda
