Federal Reserve: CBDC issuance will cause stablecoins such as USDT to disappear

This article introduces the characteristics of CBDC and stablecoins, and discusses whether CBDC can replace stablecoins.

Recently, Federal Reserve Chairman Jerome Powell said: "If CBDC is issued, stablecoins will no longer be needed." Recently, major countries in the world have recently stepped up their research on CBDC. Stablecoins are virtual assets whose value is pegged to the US dollar at a 1:1 ratio. This article allows us to look at the potential of CBDCs and stablecoins by comparing their main features.

Issued by the public and private sectors

The most stable digital asset

Despite the different issuing units, both CBDC and stablecoins are known as stable assets, and their prices hardly fluctuate. CBDC is a digital currency directly issued by central banks of various countries. It is only issued electronically, without physical materials, and guaranteed by the central bank, so its value is the same as traditional paper money. With the global trend of declining cash usage year by year, countries that want to establish flexible monetary policies through electronic money have shown great interest in CBDC. A report by the Bank for International Settlements (BIS) in January this year showed that 86% of central banks around the world are working on CBDC.

Stablecoins are virtual assets with minimal value fluctuations, which is a disadvantage of general virtual assets such as Bitcoin and Ethereum. Tether (USDT) and USD Coin (USDC) are classic representatives. Its value is fixed 1:1 with the key currency US dollar (USD), so as the name suggests, it is called a "stablecoin". For example, 1 USDT can be exchanged for 1 US dollar at any time. And vice versa. There are also stablecoins such as Dai, which are not pegged to legal currencies such as the US dollar, but operate as collateral for virtual assets, but we will not discuss them here.

Since its value is fixed to the major currency, the US dollar (USD), it is called a "stablecoin". For example, one USDT can be exchanged for 1 US dollar at any time, and vice versa. There are also stablecoins such as Dai, but they are not pegged to legal currencies such as the US dollar, but operate as collateral for virtual assets, which we will not discuss here.

The advantage of stablecoins is their flexibility. Since it is a branch of virtual assets, transactions are very fast regardless of the country. Because of this, it replaces the US dollar as a key currency in the virtual asset market, and many exchanges support virtual asset transactions with USDT as a trading pair. Users can buy USDT with Korean won and trade it, or sell virtual assets and convert them into USDT. USDT is popular because it can be easily exchanged back to US dollars.

The value of USDT is fixed at 1 USD (Source = CoinMarketCap)

CBDC leads in value and payment reliability

So let's compare CBDC and stablecoins. What they have in common is that they are both digital currencies that are easy to exchange and manage and have the same value as legal tender. However, in terms of value and payment reliability, CBDC is superior to stablecoins. Because in stablecoins, temporary value changes sometimes occur due to sudden changes in demand and supply, while CBDC management is the central bank, so the value volatility is zero.

CBDC is also in the lead in terms of payment reliability. The value of CBDC is guaranteed by the central bank and can be exchanged for legal tender at any time. For stablecoins, the cash reserves of the issuing unit determine the reliability of its payment. For example, if 10,000 USDT is issued, the Tether account must also have $10,000 in cash so that users can exchange USDT for US dollars at any time.

The problem is that Tether's cash holdings are not high. Tether's asset details, which were first made public in May this year, show that among 75.85% of cash assets, cash accounts for only 3.87%, which has caused controversy. If Tether has some problems that lead to a "digital bank run" phenomenon where a large amount of short-term deposits flow out, it will be very difficult to pay Tether cash. Unlike banks, holders cannot obtain legal assistance at this time. In other words, in terms of reliability, CBDC wins.

As of March 2021, Tether’s paid-out assets are in cash at only 3.87%

Stablecoins win in terms of utilization and scalability in the virtual asset market

In terms of currency usage, the situation is somewhat different. The disadvantage of CBDC is that it is legal tender and its use will be mainly limited to the country. In contrast, stablecoins are universal and have the same value anywhere in the world. Therefore, stablecoins have more advantages in the role of transaction medium between different types of virtual assets around the world. For example, on the 20th, Mastercard began testing a service that allows users to make payments after converting them into USDC within the system when users request payments from merchants with virtual assets. This is an attempt to expand the use of virtual assets in daily transactions by using stablecoins.

By using a relatively simple blockchain network instead of a complex bank transfer network, the time and cost of the transfer process or exchange are significantly reduced. The potential of this stable currency can be seen through the Libra (DM) project previously led by Facebook. At first, Libra was planned as a large-scale stable currency project pegged to global currencies, which was highly anticipated, but it was shelved due to concerns about negative impacts on global monetary policy and government pressure.

Whether countries allow the use of stablecoins is the key

Judging from the characteristics alone, it is unlikely that CBDC will completely replace stablecoins. In addition to being the same blockchain-based digital currency, the detailed characteristics and uses of the two assets are different. However, considering the risks from a political perspective, the status of stablecoins is somewhat unstable in the recent atmosphere.

Currently, major virtual asset market countries such as the United States, China, and South Korea all hold a negative stance on the virtual asset market and the virtual asset system. Recently, in addition to Bitcoin, there has also been a trend of regulating stablecoins.

According to foreign media reports, recently, U.S. Treasury Secretary Janet Yellen urged at the "President's Direct Financial Markets Working Group Meeting" to develop a regulatory plan for stablecoins within a few months. Recently, the market value of major stablecoins in the world has grown exponentially, exceeding US$110 billion (about 126 trillion won). Exchanges holding stablecoins can freely transfer assets abroad, and unrestricted foreign exchange outflows will cause problems in foreign exchange management policies, which financial authorities believe is the main risk.

At the same time, some people are concerned that stablecoins may be abused for money laundering because they are a convenient way to obtain US dollars. For this reason, the virtual asset exchange Aprobit stopped supporting USDT transactions on the 8th to prevent stablecoins from causing legal risks in the declaration of special payment law business. On the same day, the Bank of Korea also provided a "Study on Stablecoin Regulatory Trends and the Role of Central Banks". While observing the trend of managing stablecoins at the national level, the focus is on whether stablecoins can escape the fate of being restricted.

Conclusion

When users use CBDC, their financial status and payment details are traceable. This is different from the anonymity of general virtual currencies. It is impossible for a state-issued CBDC to allow users to pay merchants anonymously when spending money to buy goods. Therefore, the popularization of CBDC in the next few years is an inevitable trend. However, judging from the characteristics of CBDC and stablecoins, the two are likely to coexist peacefully. The key lies in the attitude of the national government towards stablecoins.

Alipay and WeChat have changed people's payment methods and living habits. Will the emergence of CBDC further optimize people's payment methods? Let's join the community and discuss together!