How Will Central Bank Digital Currencies (CBDCs) Impact Stablecoins and DeFi?
Extensive research and development are underway in the realm of central bank digital currencies (CBDCs), with China’s digital yuan leading the herd. No other nation has reached this stage, but G7 finance heads have reached a consensus over some fundamental principles and practices for CBDCs.
However, it’s important to note that CBDCs could be an existential threat to permissionless decentralized finance (DeFi). The specific aspects and benefits of crypto led to the emergence and evolution of DeFi. Crypto traders are allowed to leverage arbitrage and settle payments of any value almost instantaneously, round the clock, from anywhere in the world.
It’s the future of stablecoins that seems slightly precarious at the face of the development of CBDCs. As cryptocurrency and decentralized finance markets have grown in value and there’s a steady rise in institutional interest, regulators have become increasingly cautious.
Nonetheless, CBDCs have a few advantages over stablecoins. They have the ability to embed digital identity and compliance features from the outset. On the flip side, stablecoins like tether (USDT), which are issued across multiple blockchain networks, run within the confines of the rules prescribed by the platform.
CBDCs also have the potential to automate the process of tax collection and distribution, thereby reducing taking the burden off the shoulders of banks. So, given a choice between CBDCs and stablecoins, the advantages inherent in CBDCs would be a breeze for pretty much all financial institutions.
There are many dilemmas involved in setting forth a retail CBDC. It would mean that the true impact of the transformation will become clear only in a few years. It’s already becoming apparent that CBDCs are creating substantial opportunities for the global financial system. But it’s advisable to always remain cautious because such fast-paced development of CBDCs could pose an existential threat before DeFi and stablecoins.