Research Summary
This report provides an in-depth analysis of stablecoins and central bank digital currencies (CBDCs) as alternatives to the traditional banking system. It explores the three categories of stablecoins: fully collateralized, algorithmic, and fractional algorithmic stablecoins, and discusses the benefits and drawbacks of a potential US CBDC. The report also examines the performance and distribution of prominent coins in each category.
Key Takeaways
Understanding Stablecoins
- Definition and Types: Stablecoins are cryptocurrencies whose value is tied to a fiat currency or commodity. They come in three types: fully collateralized, algorithmic, and fractional algorithmic stablecoins.
- Benefits and Risks: Stablecoins offer benefits such as self-custody, cost-effective remittances, and broad financial inclusion. However, they also carry risks related to centralization, counterparty risk, and smart contract vulnerabilities.
- Market Dominance: No single stablecoin or issuer has managed to dominate the market, with users having the freedom to choose which stablecoins they use.
Central Bank Digital Currencies (CBDCs)
- Definition and Function: CBDCs are digital currencies that are liabilities of a central bank. They offer similar benefits as stablecoins but within a centralized, permissioned system.
- Regulation and Control: The use of CBDCs is subject to a validation process that enforces government policies, such as know-your-customer and anti-money laundering laws.
- Global Adoption: Two countries have launched CBDCs, 13 have launched a CBDC pilot, and 20 have launched a CBDC proof-of-concept. 86 countries, including the United States, are researching CBDCs.
US CBDC: Potential Benefits and Drawbacks
- Benefits: A US CBDC could offer low-risk credit to the public, reduce demand for commercial and non-bank money, compete internationally against other CBDCs and stablecoins, and provide new financial services and products.
- Drawbacks: A US CBDC would require significant reform of the US financial sector, could affect the demand for low-risk assets like US treasury bills, and could introduce efficiency but also risks of corruption and privacy invasion.
Actionable Insights
- Investigate the Potential of Stablecoins: Given their benefits and growing adoption, stablecoins present an interesting area for further exploration and potential investment.
- Monitor Developments in CBDCs: With increasing global interest in CBDCs, it’s crucial to stay updated on developments in this space, particularly in the US.
- Consider the Risks: While stablecoins and CBDCs offer potential benefits, it’s important to consider the associated risks, including centralization, counterparty risk, and regulatory challenges.
