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A digital pound, issued by the Bank of England, would be seamlessly exchangeable with cash and bank deposits, ensuring the continuity of a trusted, uniform what are stablecoin payments and accessible means of payment. As a publicly provided platform, it could foster innovation by enabling a varied range of private sector firms to develop innovative and user-friendly services. Our key conclusion is that public money, including CBDCs, and private money, such as stablecoins, should continue to coexist.
Stability amid the volatility of crypto: Stablecoins explained
This could occur if private issuers’ commercial incentives make convertibility costly, slow or complex, potentially leading to market fragmentation. Providing banknotes as a universally accessible form of retail central bank money – a financially risk-free asset – has been a core responsibility of the Bank for much of its existence. A digital pound could extend access to retail central bank money by supporting and complementing the system of cash and privately issued money – primarily commercial bank deposits and new forms of private digital money in the future. This coexistence of public and private digital money may offer individuals and businesses options for conducting https://www.xcritical.com/ transactions and managing financial affairs. Private money could cater to specific market niches that public money might not adequately address.
- A stablecoin is a digital asset pegged to the value of a real asset or another cryptocurrency.
- Box C expands on the anticipated benefits of the digital pound public-private platform.
- In bitcoin and other networks that follow its model, miners verify transactions by using large amounts of computing power to solve complex math problems.
- Achieving the policy objectives of a digital pound requires a programme of stakeholder engagement to ensure that all voices are listened to, including understanding the concerns, perceived risks and opportunities of new forms of digital money.
- This is especially important as PSD3 will likely introduce mandatory fraud refunds.
Timeline: Race for the future of money
Similarly, many countries’ existing electronic payment systems are relatively inefficient to operate and often not instantaneous or 24/7. With the rapid rise in circulation of stablecoins over the past couple of years, central banks have stepped up efforts to explore their own stable Prime Brokerage digital currencies (Exhibit 2). With pilot programs ongoing around the world, central bank digital currencies (CBDCs) and private-issue stablecoins are attracting the attention of numerous financial institutions. Banks and other financial-market participants see potential impacts across core business activities including payments, financing, and capital markets. Critical to these applications will be the role of treasurers, who will be responsible for managing the new iterations of money and attendant financial risks. Ultimately the fate of CBDCs and stablecoins may be decided by the significant forces of regulation and adoption.
Central Bank Digital Currencies and Regulatory Alternatives: the Case for Stablecoins
Understanding the evolution of stablecoins and leveraging them appropriately will be critical for digital asset investments. Firms with more financial headroom may have capacity to pursue optional investments. While we expect no significant uptake in the use of stablecoins in European retail payments in 2025 – the primary use case remains digital assets trading – some payments applications are emerging. These include remittances and cross-border payments.12 European firms seeking market leadership may issue one for brand recognition, potentially gaining an edge if retail use cases emerge. Right now, private banks and payment companies are the most important players in the everyday use of money.
But a central bank digital currency (or CBDC) would be a digital version of banknotes and coins, letting people hold and make payments in central bank money. Stablecoins are privately issued digital currencies generally backed by safe and liquid assets, with their value typically pegged to the U.S. dollar. While introducing CBDCs has received more attention than regulating stablecoins, I argue in this article that privately issued stablecoins could be equivalent to CBDCs — particularly in the U.S. — under some conditions. If integrated effectively into existing products and services, both could facilitate more efficient investment in securities, foreign exchange, and various cash instruments.
Tether (USDT) is the world’s first stablecoin, the largest in terms of market capitalization, and the most transacted stablecoin in the market. Pegged to the U.S. dollar on a one-to-one basis, Tether claims its coin is backed 100% by a diverse mix of assets, most of which can be viewed on its website. Centralized stablecoins, like USDC (USD Coin) and USDT (Tether), are issued by central entities (like Circle or Tether). The minting process for these stablecoins is both straightforward as well as largely dependent on the trust in the issuing entity. Where stablecoins offer superior benefits, customers will naturally gravitate toward them,” Miles Paschini, CEO at FV Bank, told PYMNTS.
Because of the dollar’s global status, the centrality of the U.S. technology ecosystem, and Washington’s so-far comparatively permissive attitude, the dollar is already the peg of choice for stablecoins. Much depends on the safety and liquidity of the underlying assets, and on whether they fully back the coins in circulation. It also depends on whether assets are protected from other creditors if the stablecoin provider goes bankrupt. In the absence of a digital dollar and with significant bipartisan support, stablecoin adoption could see significant growth under the incoming administration.
This means that for every dollar token issued, an equivalent value is deposited as cash or cash equivalent in audited reserve accounts, thereby tokenizing deposits. Stablecoins are a digital payment innovation that provides a unique blend of cryptocurrency convenience and price stability. They aim to maintain a stable value pegged to an underlying asset, such as fiat currencies like USD Coin and Tether, or commodities like gold-backed stable tokens like Pax Gold. Stablecoins emerged as a response to the volatility of traditional cryptos like BTC, offering fast, global reach and accepting stablecoin payments without price fluctuations. A central bank digital currency (CBDC) is a digitized form of national currency issued by a country’s central bank.
However, CBDCs could potentially eat into the market share of crypto, as they are likely to be more stable and backed by governments. The top stablecoins by market cap include Tether (USDT), which is backed by the US dollar. His work has been featured in the New York Times, USA Today, Fox Business Network, Wall Street Journal All Things Digital, the Atlantic Podcast, and more.
For instance, Sky Protocol issues stablecoins backed by low-volatility and highly liquid assets. This mirrors the fractional reserve system initiated by the Federal Reserve Act of 1913. For example, by 2027, EU firms must accept EU Digital Identity Wallets for SCA. Additionally, EU firms may capitalise on opportunities presented by the Digital Markets Act, including opening access to Near-Field Communication (NFC) technology on mobile devices provided by certain BigTechs, to create new digital wallets. These wallets could offer consumers alternative options for in-store and online payments, competing with BigTechs, and potentially incorporate open banking-enabled Account-to-Account (A2A) payments.
The rates paid to reserves backing stablecoins could even be different than the ones paid on regular bank reserves. As for making them accessible to a large share of the population, this could be done by subsidizing or otherwise incentivizing banks to open stablecoin accounts for financially marginalized households. The race for the future of money is on, so here are the key items to catch you up on what a central bank digital currency is—and what it isn’t. In the case of CBDCs under a centralized (rather than a federated) model, the central bank would effectively become the sole intermediary of financial transactions. Banks would no longer compete for retail or business cash depositors, instead borrowing wholesale from the central bank to finance their lending activities.
These efforts also contribute to broader benefits for the UK’s fintech sector, particularly in areas like real-time payments and tokenised deposits. The public sector plays an important role in fostering payments innovation by providing digital public infrastructure. Examples like Brazil’s Pix and India’s Unified Payment Interface (UPI) demonstrate how such systems can drive SME growth and economic dynamism.footnote [5] Though the UK’s payment ecosystem is advanced, there is room for further development. By supporting the fintech sector and enabling public-private platforms, the Bank could help drive innovations that benefit the entire economy.
Projects often tackle challenges such as cross-chain interoperability, enhanced privacy features, and faster transaction confirmation times. These technical innovations, while not always successful, contribute to the overall advancement of cryptographic technology. Solana (SOL) represents a newer generation of smart contract platforms, designed with a focus on high throughput and low transaction costs.