Stablecoins could be in the hot seat, but an integral part of crypto innovation

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Recent commentary and discussion on the roles, opportunities and challenges of stablecoins have made headlines in the United States and other markets. As part of the response to these discussions, more than 100 countries around the world quickly became very interested in developing a state-backed cryptoasset, commonly known as central bank digital currency (CBDC).

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Apart from the very strong opinions and positions which have been defended by supporters of the (CBDC), there are several advantages and disadvantages which can be stated on an objective basis. The advantages and positives associated with this idea include 1) the support and legitimacy of a nation-state behind a crypto-asset, 2) lower price volatility that should result from this institutional support, and 3) finally – the increased appetite and desire of individuals and entrepreneurs to use crypto as a medium of exchange.

Of course, for every positive or potential positive, there will be negatives, many of which have been stated repeatedly by supporters of decentralized crypto options. First, the very idea of ​​a centrally managed and governed crypto-asset is anathema to many of the most engaged users of crypto. Second, the history of central government intervention with currency control, especially the effect on purchasing power, does not bode well for the implications of government-run crypto. Finally, it is possible that a traceable and immutable record of all transactions made by users of a CBDC can be tracked, i.e. the creation of a centrally controlled monitoring tool.

Given these important positives and negatives, there is clearly room for innovation and creativity in the further development of these crypto-assets; Stable coins can play a key role in this process. Let’s take a look at the critical role stablecoins can – and should – play in the development of CBDCs in the future.

Competing funds are not new. As strange as it may sound or seem in the present day, the history of money and currency is much more complicated than it seems. Direct government control over a nation’s currency and the monopoly governments have over currencies used in a certain jurisdiction have not been the norm in most circumstances. Even in the United States, which (relatively speaking) has little experience with self-governing monetary policy, there is a long history of competing currencies and monetary sources.

Stable coins, framed in this context, do not represent anything specifically new or innovative, but rather a revision of how money and currencies have traditionally developed. In other words, stablecoins can be seen as both a throwback to the past while opening a door to the future of money.

Competition improves results. Competition in all its forms invariably leads to better results, better products and services, and it is only since 2020 that this has been demonstrated in the stablecoin space. Whether it’s improved user interfaces, greater transparency into how stablecoins work, or solutions that allow individuals and institutions to make better use of these crypto-assets, the trend is clear. Competing strengths, products and third-party solution providers have – and will continue to – improve products and services for end users.

Why should CBDCs work differently? Especially when it comes to technology-based products and solutions, there is a history of how public-private partnerships can work together to develop better solutions. Lessons learned from stablecoin projects and other private sector initiatives have been and should continue to be applied to public sector ideas and projects.

Consistent transparency standards. Much has been written and discussed about the importance, for investors and regulators alike, of understanding what assets underpin certain stablecoins. Tether may have received the greatest coverage, as the USDT has by far the largest stable single coin market cap, but this problem exists far beyond a single coin. In order to generate interest and a willingness to actually use stablecoins for transactional purposes, everyone involved in these transactions is expected to understand how these transactions are handled.

Given the widespread efforts underway to develop CBDCs in a range of countries, with many options to underpin these crypto-assets, it makes sense that an interest in transparency exists for these instruments as well. Trust but verify is an old adage that applies to CBDCs as well as other government and political matters.

The lessons learned and learned from the stablecoins issued by the private sector can and should be applied to the further development of CBDCs. The sheer volume of work and projects underway is remarkable, especially considering just a few years, the very idea that governments condone – let alone issue – cryptocurrencies was a marginal idea at best. CBDCs will eventually hit the market with a bang, but that doesn’t mean the fate and fate of private stablecoins is obsolete. Rather, the legacy of stablecoins can be both the proliferation of private and competitive currencies and the enhancement of ultimately successful CBDC projects.

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