It is not news that governments from various countries have shifted from apartheid to the actively involved side of crypto exchanges. As digital currencies have proven unstoppable, efforts are being made to regulate them. Financial regulators are doing everything they can to mitigate cryptocurrency investors’ losses and reduce risks. The Federal Reserve and other U.S. regulators have once noted that stablecoins need more regulation and should be handed out by banks. The introduction of a Federal digital dollar is intended to mitigate volatility risks by providing an authentic store of value. A digital dollar has the potential to transform the financial system by speeding up payments around the world and providing consumers with greater access to the financial system. According to the Atlantic Council, approximately 90 countries, including China, are exploring or launching their own CBDCs. Some are concerned that if the US does not digitize the dollar, it will lose its dominance over the global financial system.

While lawmakers, the White House, and Congress debate the issue, the private sector is likely to move forward with products that will weaken the case for a digital dollar, and when it is finally launched, a Fed CBDC will be less of a game-changer than it is now. This is about the Central Bank’s decision to refer the issue to Congress, which means that an official United States digital dollar is still several years away. However, before bringing the issue to Congress, the Federal Reserve of the United States issued a much-anticipated paper outlining the benefits and drawbacks of adopting a digital dollar. 

According to the report, a U.S. CBDC would best serve the U.S by being a privacy-protected, intermediate, easily transferable, and identity-verified digital currency. It went on to say that any CBDC would have to create a balance between safeguarding consumers’ privacy rights and providing the transparency required to curb fraudulent activity. 

A CBDC in the United States would provide the public with wide access to virtual currency that is free of credit and liquidity risks, claiming that all other options, which includes stablecoins and various digital coins, needed mechanisms to lessen credit risk, and liquidity but the mechanisms are all imperfect.

The truth is that many people who use stablecoins don’t necessarily want a safe coin; they want a more convenient way to conduct business, particularly internationally. The disadvantage is that banks presently depend heavily on deposits to finance their loans. A CBDC that is widely accepted would be a near-perfect or close replacement for commercial bank money. The substitution effect may result in a decrease in the average amount of deposits in the system of banking, which may heighten bank funding costs, raise credit costs or reduce credit availability for governments and businesses.  

Would there be any room for stable coins after countries launch their CBDCs?

For years, central bankers and lawmakers in the United States have lamented the rise of stable coins. These non-governmental digital tokens are increasingly being used in domestic and international transactions, which is concerning for central banks because they have no say in how this space is regulated. Stable coins are the latest manifestation of cryptocurrency in which the value is linked to several assets, be it a commodity or sovereign currency. According to Federal Reserve Chair Jerome Powell, there is room for privately issued stablecoins to coexist with a potential central bank digital currency.

Here’s an example: even though there are over 10,000 coins, most people still use Bitcoin because it was the first. Regardless of Ethereum’s high gas fees, it still ranks far ahead of Solana due to the first-comer advantage it enjoys. Aside from that, as previously stated, there are already over 10,000 cryptocurrencies, so a digital dollar would be entering a very crowded field. This illustration is not intended to rule out the possibility of central bank digital currencies being more popular than existing stablecoins, but rather to emphasize how vast the crypto market is and that investors trust a cryptocurrency based on its durability because all of their whitepapers paint them in a favorable light.

There are also various types of investors in the crypto space; some prefer the darkest, most decentralized currencies and do not want their activities to be discovered by the government. In contrast to cryptocurrencies, which are managed by private actors, a CBDC would be issued by the central bank, which simply means more regulation. In any case, the government may impose restrictions on private institutions that provide stablecoins after they have launched an alternative—CBDCs.