For over 14 years, central banks worldwide have seen blockchain technology deliver highly secure, immutable, verifiable and transparent financial ecosystems, starting with the Bitcoin network. Central bank digital currencies (CBDCs) stood out as one of the ways for fiat currency to harness a part of what cryptocurrencies achieve today.

    To not only keep up with rising inflation and cut down on operational costs but also to counter money laundering and related concerns, 98 of 195 countries — representing over 95% of global GDP — have either launched or are researching and developing their own versions of CBDC.

    Global CBDC initiatives overview. Source: Atlantic Council

    With CBDCs joining the race to dominate the future of finance, the relevance of the stablecoin ecosystem — cryptocurrencies backed 1:1 with fiat, such as the United States dollar — comes into question.

    As the managing director of crypto exchange Bitget, Gracy Chen got a front-row seat to the global disruption of cryptocurrencies. In an interview with Cointelegraph, Chen shared her thoughts on the future of stablecoins as CBDCs make their entry into the mainstream.

    Cointelegraph:How relevant will stablecoins be (in retail and wholesale markets) once CBDCs are circulating?

    Gracy Chen: According to the definition of the Bank for International Settlements (BIS), CBDCs can be divided into two categories according to users and purposes:

    Wholesale CBDC: It is mainly issued to commercial banks and other large financial institutions for large-value payment settlement.

    The wholesale CBDC with improved liquidation efficiency through blockchain technology is under a relatively mature regulatory system and can be supervised more easily with large amounts of funds. But, it also has disadvantages such as limited case uses (only suitable for participants like large companies).

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    Retail CBDC: It is mainly issued to individuals and companies and is widely used in small retail transactions as a cash supplement. This kind of CBDC helps enhance social welfare and improve payment convenience along with rich use cases. Nonetheless, supervision of it is difficult and intricate. Meanwhile, the high demand for transactions per second poses a challenge to the computing power of blockchain technology.

    Overall, retail and wholesale CBDCs are complementary to each other. The central banks of various countries have different needs for CBDCs at different stages of their own development. Therefore, the strategies and means of developing CBDCs vary based on the local market situation. According to the data survey of BIS, among the 66 central banks that participated in the survey, 15% of them are working on the wholesale CBDC, 32% are studying retail CBDC and the remaining ones are embracing both.

    Stablecoins and CBDCs may coexist in some way in the future, depending on how restricted the regulations would be on stablecoins and the adoption rate of CBDCs.

    CT: What impact does the recent USDT price fluctuation have on the stablecoin ecosystem?

    GC: Basically, Tether (USDT) fluctuates once in a while, mainly due to the concern about the opacity of USDT’s collateral (not 100% backed by fiat USD) and FUD sentiment caused by scandals and collapses in the industry.

    Thanks to the suspicion and risks of USDT’s opacity, USD Coin (USDC) has exploded rapidly since 2021, and its market share has increased from 20% to 30.5%. However, due to factors such as the long-arm jurisdiction of the United States, users also have certain concerns about USDC.

    Native overcollateralized stablecoins, such as Dai (DAI), the upcoming Curve DAO Token USD (crvUSD) and Aave’s GHO (GHO) are all representatives with blockchain decentralization ethos and may also have the potential to become mainstream stablecoins in the future.

    CT: How much control should entrepreneurs have over their crypto ecosystems?

    GC: To some extent, it is good that influential and insightful entrepreneurs have more control over their crypto ecosystems in the early stages, as excellent leadership will help the development of the company and its ecosystem. But in the aspect of the users’ assets that are stored on the platform, it is necessary to establish strict rules for internal risk control, asset classification and custody isolation, and private key wallet multi-signature management policies to ensure the user’s asset security and transparency.

    CT:Amid geopolitical tensions, some governments have chosen to use their own currencies for cross-border payments. Is this a trend that will continue? Will this sentiment translate to the general public? How will it impact the stablecoin ecosystem, if at all?

    GC: Most of CBDCs are operated in a centralized manner, along with the characteristics of controllable anonymity and privacy protection. The stablecoins under this kind of system still rely on the supervision system from where the CBDC is located, and there is no fundamental change or effect to the reserve proof of the encryption system.

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    Some CBDCs with higher decentralization and interoperability will have higher compatibility for different encryption ecology, and stablecoins under this type of system will be more open and transparent. An example is Project mBridge, a cross-border payments project that was carried out by Bank for International Settlements and four central banks this year through a distributed ledger technology platform. The pilot involved the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates.

    CT: What are your thoughts on CBDC-backed stablecoins? Will it aid proof-of-reserve initiatives for crypto ecosystems?

    GC: CBDCs may weaken the power of traditional banks, same effects from the stablecoins and the crypto ecosystem as well. In my opinion, cooperation with more countries and more mainstream national regulatory policies will facilitate and support the widespread adoption of stablecoins.

    CT: What are some of the main characteristics you’d like to see in CBDCs?

    GC: I want to see more CBDCs with a certain number of nodes, which means their information transmission does not completely depend on a certain institution (such as the central bank). I also want to see some CBDCs that have good interoperability in technology. All these things are good characteristics that would make CBDC more compatible with the blockchain ecosystem.

    Conclusion

    While CBDCs are not considered direct competition to cryptocurrencies, they inherit numerous qualities from crypto that help eradicate problems within the existing fiat ecosystem. Moreover, the backing of central banks provides investors with a sense of security when compared to trusting entrepreneurs, given the track record most recently set by FTX CEO Sam Bankman-Fried.

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