CBDCs and stablecoins are two “logical tools” to support the mass adoption of digital assets

The concept of digital currencies has become more prevalent with the advancement of technology and the development of financial systems. Central Bank Digital Currencies (CBDC) and stable currencies are two emerging digital currencies that are believed to have the potential to revolutionize the world of finance and banking services.

CBDCs are digital versions of backed fiat currencies issued by central banks, while stablecoins are cryptocurrencies pegged to the value of other assets, such as traditional fiat currencies or precious metals.

As of February 2023, 114 countries, more than 95% of global GDP, have begun to explore central bank digital currencies, according to data from the Atlantic Council. Of these countries, 11 have already fully launched their own digital currency.

Many countries in the Middle East and North Africa, including Saudi Arabia, the United Arab Emirates, Oman, Bahrain, Kuwait, Qatar, Morocco, Jordan, Tunisia and Egypt, have either explored or experimented with and developed their own digital currency.

Meanwhile, the latest numbers from Coin Metrics show that more than $7 trillion were settled in stablecoins in 2022, a significant increase from the previous figure of $6 trillion in 2021 and $1 trillion the year before.

Simon Mazzuca, founder and CEO of Wallex, a fiat and digital asset infrastructure developer, believes that this new trend is “the natural evolution of the financial system driven by the rise of cryptocurrencies.”

He noted that these assets are the “logical tool” to implement at scale. Mazuka added:

“Cryptocurrencies are really cool, but in order to drive mass adoption of them to replace traditional payment systems, it is necessary to work with a stable asset, such as a stablecoin.”

Impact on the traditional financing system

McKinsey cites four trends that have likely spurred central banks’ interest in exploring CBDCs: declining use of cash, competition with privately issued digital assets, and the loss of a coveted role as a payments innovator, along with domestic oversight of digital payments.

On the other hand, several factors, such as high inflation and a possible global recession, could boost the adoption of dollar-pegged stablecoins in emerging and developing markets.

As for the benefits of cryptocurrencies for consumers and businesses, Mazzuca said that CBDCs and stablecoins provide their users with transparency and reliability in financial transactions.

“Digital assets are built on distributed ledger technology that cannot be tampered with, which reduces the risk of fraud and corruption and enhances confidence in financial systems,” Mazzuca wrote. “Despite the above, traditional finance should enhance the use of assets.” digital by providing coordinated key services and infrastructure, including safe custody solutions, in order to make full use of it.”

The Wallex CEO also believes that the participation of well-established financial institutions can bring more institutional investment, liquidity and stability to the market. According to him, this would also encourage wider adoption of digital assets, especially among risk-averse investors.

Making banking services available to everyone

According to the World Bank, there are still 1.4 billion adults who are unbanked, and these individuals are the most remote and hardest to reach. The most common groups among these individuals are women, the poorest, the least educated, and those living in rural areas; Among the many uses promoted by proponents of CBDCs is the use of financial inclusion assets that can remedy the aforementioned problem.

The Central Bank of the Bahamas, one of the first banks to issue a central bank digital currency in the world, noted in a research paper that “the primary objective of the Bahamas Digital Dollar Project is to provide financial services to those who are not yet able to enter the banking system in The Bahamas.” “; When the Bahamas Central Bank published its paper, it was estimated that 18% of the island’s population were unbanked.

“The lack of physical infrastructure and the complexity of traditional financial services are some of the major barriers to financial inclusion,” Mazzuca added. Central bank digital currencies and stablecoins can bring more people into the formal financial system, which could greatly impact traditional banking.”

Mazzuca said that stablecoins can reduce the need for intermediaries and make financial transactions more accessible and cost-effective. their social and economic status.

“For example, the adoption of (stable currencies and digital currencies issued by central banks) in Venezuela can help a large number of the unbanked population in the country, by providing a more accessible and reliable financial system, thus mitigating the effects of economic instability and rates of High inflation, which has led many Venezuelans to use cryptocurrency as a way to preserve the value of the currency.

Mazzuca also believes that CBDCs and stablecoins can revolutionize cross-border payments, which have long faced hurdles such as slow transactions, high fees and limited access.

“By providing a more stable and efficient alternative to traditional currencies, important trade and investment flows can be facilitated, especially in emerging markets. In addition, it becomes possible to provide greater financial stability and reduce risks associated with currency fluctuations, making transactions more efficient than in terms of cost and speed.

Technical and organizational challenges

While these new assets have many benefits, they also have to overcome many obstacles and challenges, such as technical considerations and regulatory frameworks for example.

On the technical front, Mazzuca pointed to problems with the scalability of the blockchain, as the current technology used to process cryptocurrency transfers can only handle a limited number of operations per second, and added that new technologies, such as hashing and blockchain networks, are being developed. lateral, to increase the capacity of the network to expand.

Mazzuca explained that there is still a lack of consistency in regulation across regions, which could lead to a gap between regulation and market realities. He also emphasized the importance of increased international coordination and cooperation to ensure that regulations keep pace with the fast-moving cryptocurrency market.

Digitization of financial markets

Amid a growing number of central banks beginning to explore CBDCs, Mazzuca reminds institutions of the importance of employing a pragmatic and pragmatic approach to ensure the success of the project, saying that these entities should consider security and influence over traditional banking, monetary policy, financial stability, and cybersecurity when developing them. Show it to the new digital currencies.

“(With) the right regulations, all entities and people will be able to carry out secure transfers using digital assets,” Mazzuca noted.