The momentum behind Central Bank Digital Currencies (CBDCs) is building. While not imminent, they are coming, with arguably the greatest progress toward deployment having been made by the People’s Bank of China (PBoC), with real-world trials of the ‘Digital Yuan’ underway in many regions.
In fact, according to the Bank for International Settlements, 80% of the world’s central banks have at least started to conceptualize and research the implementation of CBDCs, whereas 40% are at a proof of concept stage, and 10% have deployed pilot projects.
The European Central Bank (ECB) recently highlighted the threat to countries that elect not to launch a CBDC from external interests, and yet, the development of a Digital Euro hasn’t progressed further than a public consultation. A decision on whether or not to progress is expected later this year, though ECB President Christine Lagarde doesn’t anticipate a launch before 2025, which is probably too slow to avoid some of the consequences they warn about.
The US has perhaps been the slowest of the major economies in CBDC development, with a wait-and-see policy likely to leave them flat-footed in comparison. However, partly spurred on by the pace of development in other countries, some progress has begun with a research paper exploring a move to a CBDC expected this summer and the development of a hypothetical Digital Dollar kickstarted by researchers at the Massachusetts Institute of Technology (MIT).
While CBDCs were an inevitability regardless, the sudden push in recent years was no doubt influenced by the success of stablecoins in the cryptocurrency space. Stablecoins have grown to capture over $100 billion in value and provide tremendous yield-generating opportunities in the rapidly expanding decentralized finance market.
So how do the benefits and risks of CBDCs compare to decentralized and crypto-collateralized stablecoin alternatives like Onomy Protocol’s Denoms, and what are the implications for the future?
Comparing Stablecoin Solutions
Many question the need for CBDCs when we already have digital payments. Of course, the key difference is that the existing digital payments system is just that – payments, not settlement. So while it seems payments made digitally are instant, they are effectively just promises that money is coming, vouched for by private banks.
Balances may show the funds, but the money isn’t actually moved and settled between banks until days later. With CBDCs, however, government central banks take on the liability for the money, allowing for instant settlement in what is more akin to a digital version of cash rather than simply a promise of future settlement.
On the other hand, crypto-collateralized decentralized stablecoins, such as Onomy Protocol’s Denoms, are free from the shackles of the traditional finance system, and usher in tremendous benefits as highlighted in a subsequent section. Onomy Protocol is aware that the CeFi market is imminently migrating on-chain, and has therefore built the financial infrastructure necessary for the deployment of numerous financial products, including a highly scalable and efficient blockchain network, cross-chain liquidity-backed bridges, a decentralized reserve bank that governs the minting of digital representations of national currencies, and a powerful exchange that seamlessly allows swaps between Denoms, emulating the $6.6T per day Forex market.
Benefits and Risks
Both CBDCs and decentralized stablecoins present benefits and risks from the perspective of end-users.
At the heart of this is a simple centralized versus decentralized battle. State-issued stablecoins may be perceived as lower risk, backed by the “full faith and credit” of their respective governments, whereas decentralized alternatives require higher levels of personal responsibility.
CBDCs may boost confidence and convenience in the traditional payment system, but increase the potential for censorship and deliver anti-privacy implications that go far beyond traditional financial systems. Decentralized alternatives can require more of a learning curve, but deliver higher levels of transparency in monetary policy and the freedom to transact cross-border.
Combined with the eradication of cash over time, and under the premise of combating crime and enabling efficient tax collection, CBDCs are likely to usher in an era of complete surveillance over the transactions of users: where they go, what they do, what they spend their money on, but also if and how they may spend it. Denom users can avoid such draconian practices, with the added benefit of smart contract programmability that delivers further utility across the booming decentralized finance space.
CBDCs enable a more direct monetary policy that can dynamically react to economic conditions, but still exhibit the inflationary problems of the existing fiat system, with nothing to stop the issuance of more CBDCs, reducing the purchasing power of citizens involuntarily as they perform such debasement. Crypto-collateralized stablecoins have no such problem, and no entity can inflate Denom issuance at the push of a button. Instead, anyone who can put up sufficient collateral can mint Denoms, with evident proof that the value has been backed so as not to inflate supply artificially.
Both systems facilitate significantly lower-cost transactions and real-time speed of payments by removing the inefficiencies of intermediaries like banks and clearinghouses, improving financial inclusion as a result. However, CBDCs remain under the control of government central banks as an intermediary between peer-to-peer transactions, capable of adding restrictions based on behavior or location and increasing fees over time. Denoms entail no intermediary, restrict no individual or jurisdiction, and any changes to the network fee structure are decided upon by its participants in a decentralized fashion through governance mechanisms, rather than by a centralized entity retaining complete control.
CBDCs and stablecoins will likely coexist over the coming years. In some respects, CBDCs can even help bridge the knowledge gap, bringing more participants into the world of digital currencies and allowing them to become more comfortable in the broader crypto space, aiding the move to decentralized and algorithmic representations of fiat currencies, like Denoms.
While there are some novel benefits, CBDCs are ultimately just the latest form of centralized fiat, carrying the same drawbacks of a central authority and adding additional surveillance trade-offs. All signs point towards a DeFi revolution, as citizens of the world become aware of the serious implications of centralized governance, leading to privacy and freedom infringements. Thus, many can argue that instead of fulfilling central banks’ policies, CBDCs may act as the stepping stone towards a liberating, inclusive, and frictionless financial system, with Onomy Protocol’s Denoms becoming the effective means to mint, trade, lend, and generate yield across prominent blockchain economies.