Crypto Investing
1 Feb 2022

What is CBDC & How CBDC and Stablecoin will Impact Crypto?

Ananda Banerjee

The Indian government on Tuesday announced that it will launch a central bank digital currency (CBDC) called the Digital Rupee.  Based on Blockchain technology, the Digital Rupee will change the future for Blockchain and crypto, not just in India but will have ripple effects around the world. In this blog, we dive into the details of CBDCs and the Digital Rupee. 

With cryptocurrencies all set to dictate the future of the global financial system, embracing digital as the new normal is more like the ‘writing on the wall.’ But as a crypto enthusiast, cryptocurrencies aren’t the only terms you should be aware of. Instead, to understand the digital currency space better, it is important to be aware of two key terminologies that are slowly coming up the ranks, CBDCs, and Stablecoins.

Key Takeaways

  • CBDCs are synonymous with standard cash but in the digital form
  • The proposed Digital rupee is one form of CBDC with Blockchain at its core
  • Talks about Blockchain-powered Digital Rupee are in line with RBI’s new stance towards a term called ‘Bank Note’ 
  • Stablecoins follow the crypto principles but with an improved sense of stability
  • CBDCs and Stablecoins are nothing alike on the philosophical level except the digital presence
  • The CBDC revolution is being led by central banking authorities of specific countries
  • Stablecoins are way more stable as compared to other crypto players as they are pegged to an underlying asset

The need of the hour brings us to CBDCs (Central Bank Digital Currencies) and Stablecoins. But if you feel that these new and unfamiliar expressions are a bit overwhelming, fret not, as we shall be deciphering each in the simplest possible way. Also, we would delve deeper into the finer points of CBDCs and Stablecoins to understand their eventual impact on the crypto market.  

Firstly, CBDC is just like hard cash and sound money. Simply put, CBDCs are still legal tenders issued by any sovereign economy, aimed at coexisting with the cash reserves. Also, in plain English, CBDC denotes Digital Cash.

Stablecoins, on the other hand, are still cryptocurrencies, with their value tethered to a reserve asset, predominantly the fiat currencies. 

Now that we have set the premise, an important question looms large, i.e., why do we even need CBDCs and Stablecoins when the Blockchain-powered, standard decentralized cryptocurrencies are doing relatively well? Well, that is what we are going to discuss in the subsequent sections. 

What is CBDC, and How Does it Make Sense Today?

As of today, CBDC or Central Bank Digital Currency has a new face, i.e., the Digital Rupee. For the unversed, CBDC isn’t a very complex term to understand as it’s more like the digital variant of an economy’s legal tender. 

Based on Blockchain and still centralized, CBDCs have it in them to take Blockchain use-cases to the masses. CBDC, as a concept and a new-world entity, has finally forayed into the Indian contingent as the Digital Rupee.

Aimed at lowering cash dependency, black money hoarding, settlement risks, and transaction complexities, CBDC or Digital Rupee will pave the way for a more trusted, robust, and efficient payment system. 

How will CBDC and Stablecoin Impact the Crypto market?

Before we get into the details, let’s cut right down to the chase. Both CBDC and Stablecoin will play a major role in increasing global crypto adoption, despite the fact that CBDC is nowhere related to the crypto paradigm.

So, the next time you read about these terms, keep the faith and believe that both Central Bank Digital Currencies and Fiat-pegged Cryptos are simply meant to get more people on the digital space, and once they are there, lo and behold, the elusive world of BTCs, Ethers, Doges, and more, wouldn’t be that far behind. 

For now, it is important to understand CBDCs and Stablecoins better to follow their potential, growth metrics, capabilities, and bottlenecks, closely enough.

Difference Between CBDC and Stablecoin

Despite cryptocurrencies riding on the wave of Blockchain technology having the potential to lead us into an era of simplified and inclusive finances, they are still being looked at as a ‘Store of Value’ rather than a form of sound money and a mode of exchange. This evident disconnect between the principle and current functionality of crypto did catch the attention of private institutions and monetary authorities, who eventually started unveiling mainstream, digital payment vehicles, and stabler cryptocurrencies.

Fun Fact: Digital Euro is already in its investigation phase as a CBDC, with the European Central Bank being the guiding force behind it. 

In the end, the CBDCs and Stablecoins emerged. And yes, people still confuse one for the other. Stablecoins are still crypto assets. Just that, they are pegged to a reserve asset that has a fixed value and a steady growth profile.

To simplify further, Stablecoins are minimally volatile crypto assets that still offer the exciting functionality of the blockchain network. Stablecoins also bring a good name to the crypto market that has long been touted as volatile and sketchy. And yes, Stablecoins are still decentralized to the core. 

But CBDCs are nothing like Stablecoins. Instead, they resemble standard cash reserves, but only in a digital form. Released, assigned, and regulated by the Centralized Monetary Framework of the concerned country, a CBDC is just a legal, digital tender of official fiat currency. 

Note: Select CBDCs might or might not choose to go with Blockchain technology for the issuance.

And guess what, it is supposed to be controlled by the central bank, focusing on regulating the overall transaction setup, minimizing the costs of printing and minting currencies, and ensuring the security of payments – all while protecting the existing banking setup.

Therefore, it wouldn’t be wrong to state that CBDCs and Stablecoins are relatively different digital financial vehicles with contrasting points including but not limited to the following:

CBDC vs Stablecoin

RBI on CBDC and Stablecoins

Amid the speculations and assumptions concerning the digital landscape and with newer players foraying into the market, the Indian Banking System led by RBI has also decided to make an active impression. While RBIs stance on crypto hasn’t been a mystery to any of us, its willingness to delve into the CBDC space is nothing short of promising.

Update: RBI has adopted Blockchain-powered CBDC by finally announcing the Digital Rupee, which will go on the floors by 2023

 RBI seems to be quite buoyant about the ‘Digital Rupee,’ as it would minimize the higher costs associated with printing, minting, and distributing hard money. However, it would be interesting to see whether CBDCs enjoy the same interest-bearing perks as standard banking facilities or not.

Fact Check: You would know that standard Savings Accounts held by banks offer interest on the reserves. However, if CBDC accounts start bearing similar interests, if and when they show up, people will shift from the standard banking setups and move to CBDC accounts, which might impact the country’s financial stability. 

However, the role or rather stance of RBI in regards to Stablecoins was more nuanced and indirect. During the short-lived crypto ban, investors used currency-pegged tokens or Stablecoins to continue trading without wasting time moving money from banks to the counterparties for the same. 

But then, Stablecoins, as fiat-tethered services, need a more transparent layout to function within the canopy of RBI as coin issuers often do not hold equivalent quantities of the asset, thereby ending up as fractional reserves rather than standard ones. 

CBDC and Stablecoin Effect on the Crypto Market

Long story short, Stablecoins will ensure crypto credibility faster globally as people will buy into the more stable crypto space. And in the process will end up knowing Blockchain better. Also, with the overall Stablecoin circulation staying neck-to-neck with exchange-traded cryptos for the past three years now, the effect has been and will continue to be largely positive across multiple fronts. 

CBDCs seem like anti-crypto at the moment, but they will eventually come around. For now, their primary role will be to familiarize cash hoarders with the digital space, where they will inadvertently end up coming across the massive and productive crypto space.

Fact: China’s CBDC pilot, i.e., the Digital Yuan, was the primary reason for the blanket crypto ban in September. But as fate would have it, Bitcoin and Altcoins scaled newer heights since then, eventually thwarting the restrictive policies and showing their potential regardless of authoritative stance. 

Overall, we are quite upbeat about the possibilities as anything digital will eventually contribute towards a decentralized economy with people wanting to know more about where their funds go and how they are even utilized. 

Wrap-Up

The digital financial realm, for now, seems to be biased towards the coexistence of CBDCs and Stablecoins. Still, in the long run, both are expected to contribute to the growth of the crypto market. But then, for the possibilities to hold, it would be practical to keep an eye on these new digital financial players’ trajectory, progression, and endgame. 

Common FAQS

Q1. Is CBDC a Stablecoin?

A1. No CBDC is a government-backed legal tender that might or might not use Blockchain technology. While stablecoins are tethered to commodities or fiat currencies, CBDCs are more like digital currency variants and are government-driven. 

Q2. Will CBDC replace stablecoins?

A2. No, CBDC will not replace stablecoins as each has its own utility. Instead, CBDCs and Stablecoins will surely coexist, thereby driving better crypto adoption. 

Q3. Will CBDC end Bitcoin? 

A3. Not at all, as Bitcoin is already the largest cryptocurrency by market capitalization, and unlike the inflationary, digitized legal tender of a country-specific currency, it is purely a store of value and a hedge against inflation. 

Q4. Does CBDC use Blockchain?

A4. CBDCs might or might not use Blockchain. The inclusion of blockchain technology is at the discretion of the country or the framework regulating the same. 

Interested in checking a few stablecoins after deep-diving into the concepts. Download the CoinSwitch app right away and get down to trading right away. 

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

writer

Ananda Banerjee

Content Writer

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