Federal Reserve: The issuance of CBDC will make USDT and other stable currencies disappear

Preface

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 increased their research on CBDC. A stable currency is a virtual asset whose value is linked 1:1 with the U.S. dollar. This article lets us look at their potential by comparing the main characteristics of CBDC and stablecoins. 

Issued by the public and private sectors

The most stable digital asset

Although the issuing units are different, both CBDC and stablecoins are called stable assets, and their prices hardly fluctuate. CBDC is a digital currency issued directly by central banks of various countries. It is issued only electronically, without physical materials, and is guaranteed by the central bank, so its value is the same as traditional banknotes. With the trend of global cash usage declining year by year, countries that want to establish flexible monetary policies through electronic money have shown strong interest in CBDC. A report by the Bank for International Settlements (BIS) in January this year showed that 86% of the world’s central banks are working on CBDC.
Is a stable currency to minimize fluctuations in the value of virtual assets, which is Bitcoin , Ethernet Square disadvantages general virtual assets, etc., Tether (USDT) and Coin USD ( USDC ) is a classic representative. Its value is fixed 1:1 with the key currency, the US dollar (USD), so as the name suggests, it is called a “stable currency”. For example, 1 USDT can be exchanged for 1 U.S. dollar at any time. And vice versa. There are also stable currencies such as Dai, which are not linked to legal currencies such as the US dollar, but operate as collateral for virtual assets, but we will not discuss them here.

Because its value is fixed on the main currency, the U.S. dollar (USD), it is called a “stable currency”. For example, one USDT can be exchanged for 1 U.S. dollar at any time, and vice versa. There are also stable currencies such as Dai, but they are not linked to legal currencies such as the US dollar, but operate as collateral for virtual assets. We will not discuss them here.

The advantage of stablecoins lies in their flexibility. Since it is a branch of virtual assets, transactions are very fast no matter which country it is in. Because of this, it replaces the U.S. dollar as the key currency in the virtual asset market, and many exchanges support virtual asset trading with USDT as the trading pair. Users can buy USDT and trade with Korean won, or sell virtual assets and convert them to USDT. USDT is very popular because it can be easily exchanged back to U.S. dollars.

Federal Reserve: The issuance of CBDC will make USDT and other stable currencies disappear

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

CBDC leads in value and payment reliability

So let’s compare CBDC and stablecoin. The common point of the two is that they are digital currencies that are easy to exchange and manage, and have the same value as legal currencies. However, in terms of value and payment reliability, CBDC is superior to stablecoins. Because in stable currencies, due to sudden changes in demand and supply, temporary value changes sometimes occur, and CBDC is managed by the central bank, so the value variability is zero.
In terms of payment reliability, CBDC is also in a leading position. The value of CBDC is guaranteed by the central bank and can be converted into legal tender at any time. For stablecoins, the cash reserves of the issuing unit determine the reliability of their payments. For example, if 10,000 USDT is issued, then the Tether account must also be prepared with 10,000 USD in cash so that users can exchange USDT into U.S. dollars at any time.
The problem is that the proportion of Tether’s cash holdings is not high. The Tether’s asset details disclosed for the first time in May this year showed that of the 75.85% of cash assets, the proportion of cash was only 3.87%, which caused controversy. If Tether causes a large outflow of short-term deposits due to a certain problem, the “digital bank run” phenomenon occurs, then Tether cash payment will be very difficult. Unlike banks, the holder cannot obtain legal aid at this time. In other words, in terms of reliability, CBDC wins.

Federal Reserve: The issuance of CBDC will make USDT and other stable currencies disappear

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

In terms of utilization and scalability in the virtual asset market, stablecoins win

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 territory of the country. On the contrary, stablecoins are common everywhere in the world and have the same value. Therefore, stablecoins have more advantages in the role of trading media among different types of virtual assets around the world. For example, on the 20th, MasterCard began testing a service. When a user requests payment from a merchant who owns virtual assets, the service allows the user to make the payment after converting it to USDC within the system. This is an attempt to expand the use of virtual assets in daily transactions by using stable coins.

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

Whether countries allow the use of stablecoins is the key

In terms of 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 risks from a political perspective, the status of stablecoins is somewhat unstable in the recent atmosphere.

At present, the major virtual asset market countries such as the United States, China, and South Korea all hold negative positions on the virtual asset market and the virtual asset system circle. Recently, in addition to Bitcoin, there has also been a regulatory trend for stablecoins.

According to foreign media reports, recently, US Treasury Secretary Janet Yellen urged at the “Presidential Financial Market Working Group Meeting” to formulate a regulatory plan for stablecoins within a few months. Recently, the market value of major global stablecoins has increased exponentially, exceeding US$110 billion (approximately 126 trillion won). Exchanges holding stablecoins can freely transfer assets abroad. Unrestricted foreign exchange outflows will cause problems in foreign exchange management policies. Financial authorities consider this to be a major risk.
At the same time, there are concerns that stablecoins may be abused for money laundering because they are a convenient way to obtain U.S. dollars. Because of this, the virtual asset exchange Aprobit stopped supporting USDT trading on the 8th to prevent stablecoins from triggering legal risks in the declaration of special payment law business. On the same day, the Bank of Korea also provided the “Study on Stablecoin Regulatory Trends and the Role of Central Banks”. While observing the movement of stablecoins at the national level, the focus was on whether stablecoins could escape the fate of being restricted.

Concluding remarks

When the user uses CBDC, the user’s financial status and payment details are traceable. This is different from the anonymity of general virtual currency. The CBDC issued by the state cannot allow users to make payments to merchants anonymously when they spend money on goods. Therefore, the popularization of CBDC in the next few years is the general trend. However, judging from the characteristics of CBDC and stablecoins, the two are likely to coexist peacefully. The key lies in the national government’s attitude 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 us join the community and discuss together!

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/federal-reserve-the-issuance-of-cbdc-will-make-usdt-and-other-stable-currencies-disappear/
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