Stablecoins and CBDCs: what does the future look like?
An exciting discussion took place at the 7th European Blockchain Convention about the importance of stablecoins and CBDCs. The panel discussion consisted of Thomas Moser, Alternate Member of Governing Board at Swiss National Bank, Jean Safar, Director of Client Experience Engineering at Digital Asset, Monty Metzger, CEO & Founder at LCX and Dorian Vincileoni, Business Development Manager at Kucoin. The panelists explained what CBDCs and stablecoins are, why they matter, and what we can do to improve their markets. They also shared what they foresaw as possible trends for stablecoins and CBDCs in the upcoming five years.
Photo taken by the EBC team during the European Blockchain Convention 2022
What are CBDCs and its challenges?
“A CBDC is a digital asset as well as a liability of the central bank.” – Thomas Moser, Alternate Member of the Governing Board at Swiss National Bank
According to Thomas Moser, a CBDC is a digital asset as well as a liability of the central bank. Thomas explains that the Swiss National Bank has been cooperating with the Banque de France to work on a cross-border CBDC project. The challenges that they have encountered upon building the project are the different regulations, jurisdiction, and legal questions between the two countries. Monty believes that the vision of blockchain and CBDCs could create global access to these monetary systems.
According to Dorian Vincileoni, there are three types of stablecoins. The simplest one are the fiat-backed stablecoins, which are cryptocurrencies pegged to the value of real-world currencies. The mechanism is that the company keeps the fiat money in a bank account, and the financial reserves are audited so that people can trust that the company actually has the fiat money that they claim backing the cryptos. The second type of stablecoins are crypto-backed stablecoins. It is necessary to have more collateral than needed to back this type of stablecoin due to the volatility of the crypto market. The crypto-backed stablecoins feature a higher level of decentralization as there is a decentralized protocol managing the pegging process. The third type of stablecoins are the algorithmic stablecoins, which are uncollateralized. This type of stablecoin utilizes an on-chain algorithm to adjust the supply and demand of the tokens, just as central banks regulate the supply and demand of fiat money.
“The current legacy systems are not efficient and the innovation will open up new worlds. Blockchain is to the money what email was to the letters.” – Monty Metzger, CEO & Founder at LCX
Visual of Monty Metzger, Jean Safar, Thomas Moser and Dorian Vincileoni
“In the future all financial markets will be interconnected on DLTs.” – Jean Safar, Director of Client Experience Engineering at Digital Asset
Doing your own research is critical
When we talk about the instability of stablecoins, the first thing that comes to our mind is the doomed TerraUSD system, that suffered a bank run. Dorian Vincileoni says that this crypto crash is a perfect example of why you should do your own research (DYOR). It is the best way for investors to avoid losing a lot of money and to protect their assets. Within the research that has do be done, Dorian stresses that a deep understanding of what stablecoins are is critical. Why are they stable? How does the peg occur? What is the process behind it? These are all important questions to take into account when doing our own research, and they have been forgotten and neglected throughout the bull market. Now, the bear market reminds us again of its importance.
Where will we be in five years from now?
Jean Safar believes that the equity and bond markets will be digital and on DLTs (decentralized ledger rechnolgies). The financial markets will link to each other with CBDCs. He is convinced that in the future, all financial markets will be interconnected on DLTs. Thomas Moser thinks that there will be more adoption of CBDCs, which will more likely start in developing countries and emerging markets. He also foresees a future of co-existence between CBDCs and stablecoins, for which new regulations will be essential.
Dorian Vincileoni states that regulations will be key. He is sure that in five years, we will probably have a better idea about what central banks want to do with CBDCs, and that the mass public will have a better understanding of what stablecoins and CBDCs are. We will live in a world where cash, commercial bank accounts, and CBDCs co-exist, and we will build use cases for them to compete with each other to find out which one is the most useful in each circumstance.
Monty Metzger concludes that even though there has been some skepticism, there are still many developments going on with CBDCs and stablecoins. To build this ecosystem, new regulations are necessary, infrastructure has to be built, and the public needs to be educated on how everything works.
“If you want to keep your money safe, you have to pay attention to which type of stablecoin you are using.” – Dorian Vincileoni, Business Development Manager at Kucoin
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Published August 11, 2022, Barcelona