Experts have identified that there is a gap in the market for electronic currencies – they are faster, cheaper, and allow for instant cross-border transactions. Governments, banks, and investors are locked in a race to explore the best ways to provide more instant digital transactions.
At the forefront of the conversation around digital currencies are CBDCs (Central Bank Digital Currency) and stablecoins. Some predict that one will come out on top of the other, whilst others are more interested in working with them in tandem. Although the future surrounding digital currencies is not certain, they are bound to be important in one way or another.
What is the difference?
CBDCs are the virtual version of fiat money – traditional legal tender, like banknotes and coins. They should not be confused with existing digital payment systems, like Paypal or Alipay, as they are an actual replacement for fiat currency. In the same way as the latter, they are issued by a country’s monetary authority or bank. This emphasises the key difference between CBDCs and cryptocurrency, as conventional cryptocurrency is not controlled by a central entity.
Stablecoins are a type of cryptocurrency. They are designed to be pegged to the prices of real-world assets, like gold reserves or the US dollar. Compared to other cryptocurrencies, like Bitcoin, the advantage of stablecoins is that their value should not fluctuate so much – since they have a fixed value.
Pros and cons of digital currency
The greatest potential benefit of digital currencies, in general, is that they offer help for those without bank accounts. In Africa, less than half of the continent’s population is predicted to have a bank account by 2022. They also allow both individuals and companies to make faster and easier instant payments.
Some people would favour a complete shift to stablecoin systems, especially because of the possibility for more secure and transparent transactions, the stability of being asset backed, and the potential for borderless payments. However, others would argue that a lack of regulation is the biggest risk of stablecoins. For example, they might not be fully backed by the reserve currencies they say they are.
Many banks have been moving to adopt CDBCs to avoid the potential threat of cryptocurrencies completely replacing cash. Some experts say that it is safer to go with CDBCs in the long run, since they are state issued electronic currencies, a mainstream distribution would be implemented in a more organised way. Their security is also emphasised by the fact that many governments are already looking to establish their own form of CBDC. For example, EU officials are seeking to launch a digital euro by 2025. And, in 2021, the Bank of England and HM Treasury announced a collaboration to create a UK CBDC. On the flip side, many would say that stablecoins are more efficient in ensuring borderless transactions.
What the future holds for digital currency
Although many experts assert that there must be a clear winner between CDBCs and stablecoins in the end; there is also talk of a potentially two-tiered system, where both are used in combination. Now that the gap for electronic currencies in the market has been exposed, a move towards digital currencies in the future is inevitable. And it might come sooner than we think. There is speculation that the introduction of the digital Yuan will coincide with the 2022 Winter Olympics in Beijing. Whether we like it or not, electronic currencies are the future.