HomeCryptoStable CoinThe Central Banks Digital Currency (CBDC) and stablecoin relationship

The Central Banks Digital Currency (CBDC) and stablecoin relationship

The term systemic risk is often mentioned in relation to Central Bank Digital Currencies (CBDCs) or stablecoins, especially Libra.

In order to understand the meaning of this risk, it is necessary to first describe how deposits with central banks work. As a general rule, only authorised institutions such as banks can open a depository relationship with the central bank. 

This is where institutions can deposit the assets they hold without debtor risk, as the central bank, by definition, cannot go bankrupt. By contrast, normal people, i.e. customers of credit institutions, can only open an account with a normal bank. The assets deposited here are called scriptural money. In such cases, although the bank is supervised and has to comply with strict capital adequacy regulations, it is subject to the risk of bankruptcy. 

Customer deposits are guaranteed up to a certain amount (e.g. EUR 100,000), but above that, the assets are no longer covered and it is not uncommon to see the states themselves bailing out credit institutions in order to avoid risk contagion with other banks.

This mechanism could put financial stability at risk should a CDBC be issued. Consider the situation in which the central bank issues a CBDC and allows each person to deposit their assets with it.

In this case, there would be a banking institution that has an enormous competitive advantage over all the others, that of not having any risk of bankruptcy, since it can print (or rather issue in the case of CBDC) all the money it wants. In this scenario, why should a person still use a traditional bank? 

However, if this were the case, there would be a risk that all short-term deposits would be transferred to central bank accounts, so that private banks would find themselves without the necessary capital to carry out their tasks, in particular long-term financing.

This simple explanation shows how CBDCs cannot be devised as a currency for the use of services provided by the central bank, whose task does not involve the management of customer deposits. If a central bank were ever to issue a CBDC, the role of traditional banks would have to be guaranteed by allowing only the latter access to central bank deposits.

This is not the case for stablecoins. Being by definition issued by private individuals, the value of money does not lie in the place where it is deposited, but in the economic strength of the issuer. In fact, even a stablecoin deposited at the central bank has no value if the issuer of the stablecoin goes bankrupt. 

The stablecoins issued by private individuals, therefore, do not create any systemic risk, except for the intrinsic risk linked to the use of the stablecoin instead of the official currency. 

This is perhaps the reason why one of the biggest critics of stablecoins is the United States, which, thanks to the dollar, can now exploit a dominant position in international trade. This hegemony is increasingly criticised and there are those who call for the issuance of CBDCs in order to stop it.

Never before have there been so many attempts by private individuals to issue money. Not only large companies with Libra but also a myriad of small companies are trying to find their place in the payments market. 

The market will tell whether stablecoins can be used in the future, for example in digital commerce, or whether they will remain a niche product used only by a few. 

One thing is certain: in the event of success, it won’t be long before CBDCs will be talked about again.

 

Lars Schlichting
Lars Schlichting
My key areas of experience are technology, data protection, regulatory and tax laws. I advise corporate clients in the application of new technologies like blockchain, as well as in the compliance in financial laws. In particular I am a specialist in anti-money laundering legislation applied to new technology, I was active in the establishing of different crypto exchangers in Switzerland and other crypto financial products. I am following a Data Protection CAS because Data Protection is the most important assets of any digital company and acting also as DPO. Further, I have extensive knowledge and experience in the tax field, especially automatic exchange of information and FATCA. I have issued numerous publications, among other concerning the consolidate supervision of financial groups, and the comments of the financial services laws and the automatic exchange of information act, as well as a science fiction romance.
RELATED ARTICLES

Stay updated on all the news about cryptocurrencies and the entire world of blockchain.

MOST POPULARS