Will the CBDC Kill the Stablecoin or will they coexist?

The question on whether CBDCs will prevail over stablecoins has been a topic of interest not only for governments but also for the general public. Yet while some believe that CBDCs once issued will cancel the need for stablecoins, there is a chance that they could actually co-exist, that is if the regulations don’t kill the stablecoins we know today.

The growth of Stablecoins and CBDCs

While stablecoins are digital currencies issued by private entities tied to something of stable value like either other crypto assets, algorithms, commodities or fiat currencies, CBDCs are Central Bank Digital Currencies equated to digital banknotes.

The well known stablecoins, USDT issued by Tether, and USDC issued by Circle are both pegged to the US dollar but in total, there are 74 stablecoins worldwide.

The number of live CBDCs pales in comparison to stablecoins. There are only three live CBDCs, in Bahamas, Jamaica and Nigeria. However, 134 countries are exploring CBDCs including Brazil, China, European Union, India, and UK. 68 are in advanced phases of exploration, development, and pilots. 19 out of the Group of 20 (G20) countries are now in the advanced stages of CBDC development.

Even countries in the MENA region are moving forward with their CBDCs, UAE is already leading when it comes to its CBDC, followed by KSA Bahrain, Qatar, and others. However, most of these countries are looking at wholesale CBDC for cross border commodity payments.

The EU is also moving forward with a digital Euro, as is Iran with its digital rial pilot, following India which is currently trialling its digital rupee both in retail and wholesale.

Yet this has not stopped the growth of stablecoins, whose volume of transfers increased 16-fold from 2020 until 2024, reaching $1.68 trillion in April. Even Ethena’s synthetic dollar, USDe. The protocol, launched in February 2024, amassed over $3.4 billion in total locked assets over four months, according to DefiLlama.

Are CBDCs better than stablecoins?

For the proponents of CBDCs over stablecoins, the main defence is that CBDCs are protected by Central Banks so they are safer and more stable than stablecoins. CBDCs are also accepted as legal tenders while stablecoins in most instances are not.

The same proponents see CBDCs as a tool for improved financial inclusion, better digital trade, and more efficient payments. CBDCs can also counter money laundering and terrorism financing because they are traceable unlike fiat cash transactions.

Yet defenders of the stablecoin have equal arguments for the importance of stablecoins. Some see it as beneficial for the unbanked as it lowers remittance costs and allows seamless cross border commerce. While others see it as a tool to safeguard funds. But most importantly all see stablecoins as safeguarding privacy.

Even in developed countries, proponents of stablecoins such as Howard Lutnick, CEO of financial services company Cantor Fitzgerald, believes that stablecoins can actually help to maintain the hegemony of the U.S dollar because citizens in emerging countries can use it, stabilizing the demand and relevance of the currency.

Will stablecoins survive the onslaught of CBDCs

To date it seems that stablecoins are surviving the CBDC onslaught. First out of the three countries that have already issued CBDCs, Nigeria is stopping its project, after the IMF showed that over 98% of Nigerian digital wallets are just gathering dust.

The situation also does not look good for Jamaica, where the circulation of its CBDC stalled due to limited acceptance. Even in the Bahamas the first to issue a CBDC called the Sand Dollar, its CBDC only accounts for 0.19% of the total circulating money in the Bahamas as of 2023.  The issue of privacy and control is hindering CBDC uptake. This is clearly seen in the United States. The U.S. House of Representatives passed a bill stopping the issuance of any U.S. CBDC without explicit authorization from Congress, potentially making the U.S. the first country in the world to ban a CBDC. The main concern is that CBDCs can track people’s spending habits unless strict safeguards are imposed.

Many view CBDCs as very dangerous because they are centralized and thus controlled by the issuing government. At most crypto proponents believe CBDCs will replace the SWIFT messaging network.  

Maybe this is why the CEO of Circle said that the stablecoin market will grow at an average annual rate of 47.7% over the next ten years. In the USA proponents believe a stablecoin bill could be passed soon, while Russia and Iran are working to launch a stablecoin backed by Gold. Even the UAE Central Bank has issued a regulation allowing for the issuance and utilization of a Dirham backed stablecoin as a legal tender in the country.

The end of non-compliant stablecoins

While CBDCs may not cause the death of the stablecoins we know today, regulations might mean the end of stablecoins as we know them. Regulations coming out in the USA, Europe, UAE, Singapore and elsewhere are targeting what they call non-compliant stablecoins.

The U.S. Payment stablecoin bill is aimed at growing compliant stablecoins, with fears that Tether will be targeted as non-compliant. US lawmakers have tightened their grip on stablecoins with the proposed Defense Bill amendment. Analysts believe the bill includes KYC and AML measures stablecoin issuers could not implement.

The compliance force has also swept Europe. EU’s MiCA legislation imposes strict reserve requirements on stablecoins based on the euro, and a cap of a million daily transactions for others. According to MiCA, companies must stop issuing non-euro denominated stablecoins used as a “means of exchange” if they exceed 1 million transactions or 200 million euros per day.

This did not stop Circle from becoming the first global stablecoin to comply with MiCA, allowing it to issue its USDC and Euro Coin (EURC) tokens in the UAE. Even Paxos has received approval to use stablecoins in Singapore under its regulations.

The MiCA regulations have led exchanges to limit availability of stablecoins. Binance has limited the availability of unauthorized stablecoins to European users while crypto exchange Bitstamp delisted Tether’s EURT and other stablecoins that did not comply with the European Union’s new laws for crypto assets.

In the UAE, the Central Bank also approved its new regulations for stablecoins, allowing Dirham backed stablecoin as a payment coin, while foreign regulated stablecoins will only be used to purchase virtual assets. This meant only AED stablecoin could be used as a means of payment within the UAE, while other non-AED regulated stablecoins could only be used for purchasing of other digital currencies.

Conclusion

While the current stablecoins we know may not be killed by CBDCs, they might be by upcoming regulations. This is happening even though the stablecoin market makes only 0.2% of the $80 trillion money market (World Population review), imagine when it makes up 1% or more!

That is why Pravica, with its infrastructure, regulatory tools, and knowhow through its S3 platform on Sui is the appropriate avenue for stablecoin and CBDC issuers!