Stablecoin vs CBDC: The Difference

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By Tokenize Xchange
December 19, 2022

This October, The Monetary Authority of Singapore (MAS) claimed that they has finished the first phase of their CBDC project. So what is CBDC? How they are different from Stablecoin? And why might the government of a nation want to develop CBDCs? This article, Tokenize Xchange – Digital Currency Trading Platform will help you answer these questions!

CBDCs and stablecoins

Before jumping into the discussion, let’s start with two blockchain terms: Stablecoin and CBDCs.

Get familiar with the terms 

What is Stablecoin?

Stablecoins are cryptocurrencies that are pegged to a range of stable assets such as real money (fiat money), with the aim of minimizing the impact of volatility, 

Stablecoins appeared to solve the biggest problem in the cryptocurrency market right now: high volatility. Instead of transferring to Fiat, crypto traders and investors can easily transfer their digital assets into stablecoins to avoid the volatility of cryptocurrencies for their personal use. 

Moreover, it is challenging for a business to accept payment in a cryptocurrency with a high fluctuation of 20-30% in value in a short period. In general, it reduces the possibility for cryptocurrency to be widely adopted.

>>>Read more: Why Stablecoins are important

As such, Stablecoins can be considered a bridge that connects the digital assets market and the traditional financial market. Converting from fiat currency to crypto is much easier today with Stablecoins.

What is CBDC?

CBDC standing for Central Bank Digital Currencies, are cryptocurrencies backed by the central bank of a nation, such as the USD of the United States. These digital assets are a digital representation of the nation’s fiat. Don’t mistake CBDC for stablecoins which are digital assets that are pegged to a fiat currency.

Many governments have been working on CBDCs as they can offer certain advantages over traditional finance such as high traceability, good AML enforcement, and improved financial and payment structures. instant, even with overseas payments.

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Stablecoin vs CBDC

How Stablecoin and CBDC are similar to each other?

In common, Stablecoins and CBDCs share their underlying blockchain technology. They both benefit from the wide range of applications of cryptocurrencies because they can facilitate fast transactions. These transactional specifics are additionally kept on a publicly distributed ledger.

The second similarity is stability. Although they are digital assets, stablecoins and CBDCs are much more stable compared to cryptocurrencies, which are very volatile. One is a form of fiat money itself, while the other is pegged to one. This virtually eliminates room for volatility.

Regulation is the third and last commonality. Both stablecoins and CBDCs are subject to regulation, with central banks overseeing CBDC regulation while private auditing firms oversee stablecoin regulation. Thus, the likelihood of a rug pull is extremely minimal.

Differences between Stablecoin and CBDC

The government authority is the basic factor in distinguishing Stablecoin and CBDC. The governing authorities of the most well-known stablecoins in the world are private corporations like Circle or Tether. On the other hand, CBDCs are developed, managed, and governed by the central banks of nations. Every nation has the ability to create a CBDC of its fiat currency and administer it similarly to actual cash.

The second difference is their nature. While Stablecoins are pegged to fiat currencies and can always be exchanged for a real dollar that is kept in the reserves. While CBDCs are the fiat themselves, in the digital form.

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Singapore is looking into CBDC

According to a big survey in May, 90% of the 81 central banks that responded to the survey indicated that they had begun developing a CBDC. While China is further along in its CBDC trials than most other nations, the U.S., U.K., and European Union are evaluating whether or not they should issue a CBDC.

On October 31, the Monetary Authority of Singapore (MAS) completed the first phase of its CBDC development progress (or Project Orchid) according to a report. 

Project Orchid’s Phase 1 investigated the idea of a purpose-bound digital SGD (purpose-bound money, or PBM, for short). When sending transfers in digital SGD, PBM lets senders set criteria like validity period and types of stores.

“Although MAS does not see an urgent case for retail CBDC, it is envisioned that the study of potential use cases for a programmable digital SGD (Singapore dollar) and the infrastructure required, would enable MAS and the financial services ecosystem in Singapore to develop capabilities to support a retail CBDC should the need arise,” said the report. 

You may access the report summarizing the results of Project Orchid’s initial phase HERE

The design considerations for developing a programmable digital SGD for potential use cases are included in the study. Future research will concentrate on raising accessibility for the general public, enhancing security and privacy capabilities, and improving user experience.

The ideal ledger technology for the CBDC will be examined in the following stage of Project Orchid, along with how it can be linked with the current system.

Bottom line

CBDCs could become the innovation reshaping the global banking and payments sector if properly executed. Governments and central banks worldwide, including Singapore, are eagerly examining the implementation of CBDCs due to their potential to improve economies, decrease transaction time and costs, support financial inclusion, and streamline foreign transactions. Keep following Tokenize Xchange – Cryptocurrency Platform Singapore for more analysis and discussion around Blockchain technology!

Disclaimer

Cryptocurrencies are subjected to high market risk and volatility despite high growth potential. Users are strongly advised to do their research and invest at their own risk.