VIXIO Blog | The Race Between Stablecoins and CBDCs

Who will take gold in the race between stablecoins and CBDCs?

It is a truism, especially in payments, that regulation follows innovation. Companies develop new products which operate in a legislative grey area, like the account information services offered by Yolt as one of the earliest examples of third-party account access, and lawmakers then move in to stake out boundaries and, in the case of open banking, lay the groundwork for an entirely new type of business to emerge.

When it comes to central bank digital currencies (CBDCs), this approach is somewhat reversed. Not since private banks in the Wild West minted and circulated their own currency have governments had to face sincere alternatives to fiat money, and instead of staking out regulatory perimeters for the new technology, central banks find themselves with little alternative but to compete.

The Bank for International Settlements (BIS) insisted in its annual economic report in June 2020 that work on CBDCs is “not so much a reaction to cryptocurrencies and private sector ‘stablecoin’ proposals” but rather an investigation by banks into how to achieve “public policy objectives” via technology — one which just happens to be gathering pace just as private stablecoins gain prominence.

But the studied innocence of this stance is belied by the central banks themselves. In its March 2020 discussion paper on CBDCs, the Bank of England stated that the growth of stablecoins poses a risk which “goes beyond” that raised by more traditional payment systems.

“Given the risks they could pose, it may be worth asking if CBDC can be designed to better meet those needs,” the central bank said.

“CBDC may be able to provide better payment services, backed by risk‑free central bank money, and reduce the demand for new privately issued money-like instruments.”

Similarly, Bank of Canada governor Timothy Lane argued in a speech in February that “if the public does want a digital cash-like currency …[only] a central bank can guarantee complete safety and universal access, and with public interest — not profits — as the top priority”.

A bumpy start in the West

Diem (formerly Libra) is the looming concern here, so far held fast in the lockbox of the approval process being worked through by the Swiss Financial Market Supervisory Authority (FINMA). It is safe to assume that FINMA won’t be making the decision without significant input from any number of other authorities — there are few countries which won’t be affected by the stablecoin’s global ambitions.

What a centrally-developed alternative to Diem might look like is still, however, uncertain in almost all jurisdictions. Sweden is widely acknowledged to have led the charge in the West with its early work on an e-krona, but even there the earliest timescale for development of a technical solution is February 2022. Across other jurisdictions from the UK to the European Union to the United States, general enthusiasm — or at least acceptance of the necessity of the project — has still generated little beyond consultations and speeches.

But if a significant driver for governments engaged in this work is the perceived need to offer a fiat alternative to privately-issued stablecoins, they can (to an extent) make their own time. Diem, or any similar product, can only move ahead when it gets the nod from regulators. If it is felt that private stablecoins pose too much of a risk in a world where central banks can offer no viable alternative, then those stablecoins could be held back until that’s no longer the case.

Even looking only at Facebook, the driving force behind Diem, it is clear that national authorities have little compunction around curtailing its activities when they feel it represents a threat to systemic payment stability. Libra’s reincarnation as Diem was seen as, in part, an attempt to shed the regulatory scepticism which had grown up around the original project. Specific actions, such as the steps taken by Brazilian authorities at the end of last year to restrict WhatsApp Pay (also a Facebook product) over concerns that it could usurp incipient national instant payment system PIX, make it clear that countries are painfully aware of the threat to payment sovereignty posed by the new generation of global private offerings.

Leading the way in Asia

Although the relatively slow pace of CBDC development in the West means this kind of regulatory hog-tying is one of the few options available to authorities, the case is rather different in Asia.

Project Inthanon, a joint initiative between Thailand and Hong Kong, and Project Ubin between Singapore and Canada have already carried out successful trials of cross-border payments over the blockchain in what the Bank of Thailand called “an important step forward in the realm of CBDC initiatives”. Although these projects are less focused on the “new cash” retail aspect of CBDCs, they do represent an attempt by central banks to wrest back the leading role in international payments.

For that retail aspect, as for most areas of payment innovation, China is the last word on the matter. It is doubtful that Facebook ever entertained any serious hopes of having Diem roll out in a country where even Visa and Mastercard have taken years to beg, borrow and buy their way in, but Chinese authorities have their own well-publicised concerns with the country’s gargantuan domestic fintechs. Alipay and WeChat Pay dominate the country’s payments market, and so the appeal of a centrally controlled counterweight may be just as appealing for Beijing as it is for Brussels and Brasilia.

China’s successful distribution of around $3m worth of CBDC to residents of Suzhou at the beginning of 2021 make clear that it is well on its way to achieving this. A timescale for mass adoption is largely impossible to predict, given both the wild popularity of existing digital payment methods and the competing interests of the country’s commercial banks, but it is safe to say that a digital yuan will be generally accessible to Chinese consumers well before one can walk into a shop equipped only with a digital euro.

A race to the finish

It’s probably unfair to cast CBDCs purely as a frantic effort by central banks to push back against private issuers, just as the regulatory holding pattern in which Diem has been held is certainly just as much to do with genuine concerns of stability as it is central banks’ desire to be first out of the gate. But Facebook’s offering won’t be the only contender for long; others, such as Tether or the Gemini Dollar (launched by erstwhile Mark Zuckerberg nemeses the Winklevoss twins), harbour ambitions of their own. It seems inevitable that, failing a drastic acceleration of the workrate, private stablecoins will be deployed before retail CBDCs outside China.

Those stablecoins could look rather different from the all-encompassing vision originally expressed by their creators, but every effort will undoubtedly be made to make them as universal as possible. Agustín Carstens, general manager of the BIS, said in a February 2021 speech that CBDCs could be “an alternative to yesterday’s failed money types”, but this stance fails to address the concern evidently felt by a number of central banks. If central banks are separately in agreement that a fiat alternative is necessary to counterbalance private offerings, the first step to success will be to say so together.

For further insight into CBDCs, VIXIO PaymentsCompliance has published a regulatory analysis, ‘CBDCs: Understanding The Urgency Behind Their Rapid Rise‘. For more information on this and other cryptocurrencies trends, please get in touch:

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