On Stablecoins, Banks, and Beyond 

The digital currency space exploded with the advent of Bitcoin, Ethereum, and its following cryptocurrencies, which now include stablecoins.

The digital currency space exploded with the advent of Bitcoin, Ethereum, and its following cryptocurrencies, which now include stablecoins.

Cryptos have several benefits that proponents like. They are not controlled by a central body, many have low or no inflation, they are transparent, and they provide safe, anonymous transactions. However, there is one issue that remains.

They still have extreme volatility.  

The prices of the two top cryptos, Bitcoin and Ethereum, regularly move by five percent in a single day. Smaller market cap coins tend to swing by much more. 

Proponents link major cryptos to gold. As the market cap grows, volatility lessens. However, its hard to imagine gold’s price fluctuating by the same degree.  

There are two avenues by which the global financial system can move to a future that has digital payments as the norm. Stablecoins and central bank digital currencies (CBDCs). 

They allow users to remain anonymous when transacting with others and eliminate the need for third-party transaction processing agents. Cryptos and CDBCs are not so dissimilar by design, but they do have some key differences that we will cover. 

Central Bank Digital Currencies (CDBCs)

The most important difference between cryptos and CDBCs is that the latter are not cryptos. 

A CBDC, like a fiat currency, is produced and regulated by a central bank such as the Federal Reserve or the Bank of England. Rather than producing cash, the central bank will issue and “store” their digital currency.

This storage is not done by a distributed ledger, as is the case with blockchain and crypto, but with a more centralized method.  The digital cash would replace fiat cash, and your details would be attached to your CBDC assets, removing this part of the anonymity, but the transaction details would only be available to the sender, receiver, and bank. With this structure, CBDCs are controlled and monitored to the extent of their respective countries. 

In their 2022 Global CBDC Index and Stablecoin Overview, PWC found that around the world, 80% of central banks are at least considering the addition of a digital version of their national currency.

Such a shift would supply central banks with additional powers, including enhanced tax monitoring. However, their goals are as simple as “providing a digital form of cash” to citizens and “better financial inclusion.”

The Bank for International Settlements (BIS) released a significant collection of reports covering the CBDC plans of 26 developing nations from Argentina to India. In these, central banks claim that having a CDBC will achieve “greater payment system efficiency,” as well as strengthen competition between payments service providers (PSPs).

The BIS report did acknowledge concerns that countries had put forward, which included cyber risks such as hacks, network resilience, cost, sufficient scalability, bank disintermediation, and the potential for low adoption. It reported that more than half of the banks worried that if:

“Not carefully managed, [cross-border CBDCs] could spur currency substitution, exchange rate volatility, and tax avoidance.”

The exact thing they’re trying to prevent with creating a CDBC in the first place.  


Stablecoins are a type of cryptocurrency. However, they differ from Bitcoin and most other cryptos in that their volatility is much lower. 

A stablecoin is specifically designed to combat the volatility seen with a conventional crypto by fixing its value to a particular fiat currency. In most cases, this is the United States dollar. 

However, there are also stablecoins linked to assets, such as gold. If the value of the asset that the stablecoin is linked to remains stable, then the coin will also remain stable. 

Tether (USDT) holds the highest spot amidst stablecoins, and its reserves are mostly cash & cash equivalents. In the past five years,  Tether’s wildest swings have not gone above $1.03 or below $0.95.

Image courtesy of CoinDesk

There are three types of stablecoins:

  • Fiat-collateralized. This means backed by a fiat currency or a commodity. Top examples include TrueUSD, and Circle (USDC), which are similar to Tether with a value of one dollar per coin. Fiat-collateralized coins use reserves of the currency or an asset to back their supply, they are maintained by independent financial institutions acting as custodians, and they are supposed to be audited regularly. Unfortunately, that doesn’t always happen. 
  • Crypto-collateralized. These differ from fiat collateralized as they are backed with other cryptos.  This backing causes them to lose their stability and requires them to have larger reserves. Using a single crypto to be a reserve is more volatile and requires the largest reserve. For $1 in stablecoins, there might be $2,000 in crypto reserves, including ETH for example. 
  • Algorithmic. These utilize computer programs to maintain their stability. If pegged to USD, an algorithmic coin’s code tracks its value and will adjust its own value to the prevailing exchange rate. It then changes the number of coins in circulation based on the coin’s value. While this may sound like a good solution, the Federal Reserve Board’s researchers reported this year that algorithmic stablecoins “may experience instability or design flaws.”

Stablecoins provide two specific attributes that make them an important part of the digital payment space: 

  1. They hold the ability to transfer value easily, making it possible for anyone with an internet connection. 
  2. They represent a foundation for programmable money able to run on various blockchain networks. Blockchains such as Ethereum, Polkadot, and others can provide the infrastructure for the creation of smart contracts interacting with stablecoins. 

This functionality has attracted the attention of large financial services companies such as Mastercard, which in the summer of 2021, said it was piloting a program to use Circle’s USDC to allow for cryptocurrency payments between cardholders and merchants. 

In 2020, Circle had a circulation of 1.1 billion digital dollars and over $58.7 billion transferred on-chain. In two years, Circle’s circulation has grown to $50 billion (Tether is presently at $74 billion). With its future SPAC IPO having a current $9 billion valuation, Circle and USDC have become a force to reckon with.

Therefore, the tensions between governments and stablecoins have increased, with U.S. regulators sharing concerns about its threats to financial stability. In February, New Jersey representative Josh Gottheimer released his draft legislation that would define stablecoins, and in November, the Bidon administration recommended that Congress regulate stablecoins to prevent them from posing a “systemic risk.”  

Moving Forward

We have seen that both cryptocurrencies and CBDCs are both similar and dissimilar. The general goal is to provide users with a digital payment system that, at a minimum: 

  • Has high adoption
  • Has low volatility
  • Causes competition between payment system processors
  • Increases monetary efficiency
  • Lowers costs for users
  • Provides public anonymity
  • Can be utilized with smart contracts 
  • Allows for low-cost cross border payments
  • Allows a country to control their monetary policy

This combination is a tall order but not impossible and is the target of any meaningful stablecoin or CBDC. 

Central banks and governments don’t wish to give up their control. They believe that having a stable economy involves controlling the monetary supply; being able to inject money into the economy when needed and altering the interbank lending rates.

The decentralized camp wants to keep governments out of economies entirely, programming crypto with respective, defined rates of inflation or with other controls over supply.   

The most difficult task will be accomplishing cross border transactions between nations. Countries are worried that if their currencies are seamlessly tied to other nations, currency substitutions could occur. Fortunately, the euro provides ample practical knowledge on the do and don’ts. 

Creating a global payments system maintaining currency stability enables the world to progress. Put another way, its vital to leave behind the disjointed system of economic fiefdoms that have stood for thousands of years. 

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade. 

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