Market Opening: The Distinction between CBDCs and Stablecoins

The lines between CBDCs and stablecoins are becoming blurred…

Here is yet another very good summary by Caitlin Long about a recent FED paper on stablecoins. Furthermore, read here an article explaining why stablecoins are unlikely to be the future of payments.

When reading through Caitlin’s thread, I had an aha moment.

I have written a couple of market commentaries about CBDCs, and I have also mentioned a few times that I am rather surprised by the Fed’s complacency in not moving forward on the topic. On a very high level, it looks to me like the Fed is not making a clear distinction between CBDCs and stablecoins. Firstly, by tokenising bank deposits, where the token will be their USD stablecoin. In my mind it would make sense to, on the one hand, use the existing commercial banks as the minting/burners of the stablecoin, and, on the other hand, to use the DLT platforms (which currently are mainly the crypto exchanges, e.g. Coinbase), where the stablecoin can be traded.

I am speculating here, but my guess is that the Fed will think about CBDCs in a second phase, when the majority of their commercial banks have gotten the hang of how to handle stablecoins. In this second phase, players such as central clearing parties and traditional exchanges will come into play, and, by then, we will be close to having a stablecoin that is like a CBDC.

Maybe one aspect that needs reiteration is that this is not positive for crypto per se. TradFi is just now adapting to a new technology (blockchain). Each nation (or central bank) has its own agenda in terms of what their primary targets for their CBDC are.

On that note, I read a very interesting thread from Adam Cochran, who comes at things from a different angle: “The way to beat inflation is with stablecoins”.

In short, he believes that if any currency with high inflation can attract demand (new use cases) for the currency, it will help to dampen inflation. The US kind of did this in 1944 with the Bretton Woods Agreement, when the dollar became the world reserve currency and a great deal of demand for it was created outside of the US (the so-called Eurodollar market). If they can pull that off again with a stablecoin that offers a solution for further use cases (that drive up the demand for it), they might be able to stay at the top of the global monetary “brrr-pyramid”.

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