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Beyond Bitcoin: Stablecoins and CBDCs

Feature Stories | Aug 04 2021

Stablecoins provide an alternative to highly volatile crypto peers. Central Bank Digital Currencies may nevertheless signal the end of the crypto explosion.

This is the fourth and last article in FNArena’s series on bitcoin and the world of digital money. Links to the first three parts are available below.

-Stablecoins: the answer to crypto volatility?
-Facebook to create a new global reserve currency?
-Central banks fight back
-CBDCs already in use

By Greg Peel

 “Cryptocurrencies such as bitcoin and ether offer a number of benefits, and one of the most fundamental is not requiring trust in an intermediary institution to send payments, which opens up their use to anyone around the globe,” notes crypto news and data service CoinDesk. “But one key drawback is that cryptocurrencies’ prices are unpredictable and have a tendency to fluctuate, often wildly”. 

Wildly indeed. As we know, bitcoin has seen a rather volatile four years, from US$1000 at the start of 2017 to US$9000 by the end, back to US$3500 by the beginning of 2019, up to US$10,000 mid-2019, down to US$6000  in March 2020 and US$60,000 a year later.

It had “stabilised” recently, if you call call it that, around US$30,000, before a fresh jump to US$40,000.

Such a history rather shatters the prospects of bitcoin as a “store of value” akin to gold, or even as the replacement currency it hopes to be.

As CoinDesk suggests: “This makes them [cryptos] hard for everyday people to use. Generally, people expect to be able to know how much their money will be worth a week from now, both for their security and their livelihood”. 

Currency exchange rates and the price of gold do move around, but not to anything like the volatility achieved by cryptos. The average global citizen is unaffected by their relevant exchange rate on a day-to-day basis. The daily rate does not inform as to whether today is a good day to buy a pint of milk, or maybe next week will be better.

Rates will move slowly over time, which ultimately will be evident in the price of imported goods, international holidays and so forth, and in the bigger picture the country’s economic growth. But exchange rates are sufficiently stable as to not to evoke short term angst.

How then, can cryptos become an alternative currency? Pundits argue that volatility will subside over time, as cryptos become more widely used. But there also exists a middle ground.

Enter “stablecoins”.

The Facebook Factor

While a stablecoin is a crypto currency, its value is “pegged” to a more stable asset class, such as a fiat currency (eg US dollar) or the price of gold.

The issuers of stablecoins “back” their currencies with a reserve of said asset acting as collateral. A simple version is to place an amount of US dollars in a US bank. When a holder of stablecoin “token”, as they are known in this instance, cashes in, an equivalent amount is withdrawn from the reserve.

The mere mention of the word “bank” would send a shiver down any crypto purist’s spine. Surely the whole point of crypto-currency is to bypass the legacy financial institutions of this world and their perceived manipulations. But stablecoins still provide the benefit of being a global peer-to-peer exchange system open to all, outside the jurisdiction of said financial institutions.

It’s a trade-off.

It’s a trade-off that Facebook decided to turn to along the rocky road of developing the company’s own crypto-currency.

Facebook first began developing a blockchain and crypto concept in 2017, and in 2018 formally announced the intention to launch “Libra”. The crypto had the support of the likes of PayPal, eBay, Mastercard and Visa.

Facebook is no stranger to regulatory scrutiny. With a focus on anti-competitive, monopolistic actions, regulators were never going to be thrilled about Facebook launching an alternative currency which may one day, given the global popularity of Facebook, threaten the hegemony of the US dollar as global reserve.

In 2019, Facebook announced the currency will not launch until all regulatory concerns have been met and Libra has the "appropriate approvals”. In a meeting with US senators in 2019, Zuckerberg said that Libra would not be launched anywhere in the world without first obtaining approval from United States regulators.

As a result, PayPal, eBay, Mastercard and Visa, along with others, withdrew their support.

In order to overcome regulatory issues, Facebook decided to launch a stablecoin instead. Mercifully, the name was changed to “Diem” from Libra. Diem would be backed by a basket of fiat currencies, including the US dollar and euro, and would be launched in January 2021.

But the market has as yet been unable to carpe Diem. Again, in order to appease US regulators, Diem’s launch has been stalled. Instead, Facebook is now planning to focus on developing multiple stablecoins, each backed by a separate national currency.

As is the case of Ethereum switching from a proof-of-work to a proof-of-stake blockchain model, the launch of Diem remains pending.

But wait, there’s more

Aside from using fiat currencies as collateral, other stablecoins are backed by reserves of precious metals, other cryptos such as ether (how this can be “stable” is unclear) and other types of investment.

On example is “tether”, which started life in 2014 as a one-for-one US dollar-backed stablecoin but this year has disclosed it is now holding almost half its reserves in short term corporate debt, typically described as “commercial paper”. The issuers of that debt have not been disclosed.

Tether is one of the oldest stablecoins and also one of the popular, and thus most valuable by market capitalisation. But if you think it might be handy as an alternative store of wealth, overlooking the commercial paper aspect, tether is used mostly to take advantage of price discrepancies between cryptos listed on different exchanges. In other words arbitrage, which would be something for fast computers, not the man on the street.

And now the founders of Tether are the subject of a US Department of Justice probe into alleged bank fraud. Specifically, federal prosecutors are scrutinising whether Tether concealed from banks that transactions were linked to crypto, back in the early stages of its existence.

Tether has also been used to shift money across borders, in particular to Russia from China, bypassing China’s strict capital controls.

Indeed stablecoins, and cryptos in general, have not proved popular with Beijing.

China’s Emissions Control

Back in 2013, the Chinese government banned domestic financial institutions from holding or trading in crypto-currencies. In 2017, crypto exchanges were banned. In 2018, Beijing began an attack on crypto mining.

Initially, mining was banned in the major provinces. The government’s issue is crypto mining’s excessive drain on energy capacity. In order to achieve Beijing’s goal of net zero emissions by 2060, energy consumption across China’s provinces is already being restricted, even to the extent of street lights being turned off in one province.

No place for crypto mining then. In response, Chinese miners, who at one stage represented 80% of all global crypto mining, upped sticks and moved to China’s further-flung provinces wherein the bulk of the country’s hydropower is produced. Beijing would not have a problem, they assumed, given energy was being sourced from renewables.

They were wrong. Beijing recently banned mining in those provinces too. Again the emissions excuse was cited, with the government noting hydropower is produced mostly after the spring snow-melt, and not all year round.

I have suggested before in this series that crypto purists believe they are “off the environmental hook”, as it were, by sourcing their energy requirements from renewables. They even suggest crypto mining will speed up the development of renewable infrastructure and as such is a positive driver in the move toward zero emissions.

What they fail to acknowledge is the world needs to speed up renewable development, just to cover lost fossil fuel power, and meet increasing demand from developing countries, and the rise of electric vehicles. If crypto mining is using up all that renewable power, it is a negative, not a positive.

Observers suggest that environmental arguments put forward by China, however viable, are a smokescreen to the real reason Beijing is effectively banning crypto-currencies altogether. The CCP does not control bitcoin, hence bitcoin (and friends) are a threat to the sovereignty of the Chinese yuan (aka renminbi), and to Beijing’s plans for the yuan to one day replace the US dollar as the world’s reserve currency. The People’s Bank of China cannot control crypto, and the CCP wants to control everything.

Last year, Beijing conducted trials in various provinces of its new, central bank-issued digital currency. In October, over 47,000 consumers in Shenzhen spent 88.8m yuan in 3,389 designated shops on a week-long trial. Trials have also taken place in other provinces, and the Chinese authorities' goal is to fully launch the digital yuan before the Winter Olympics kick off in Beijing next year.

The digital yuan is a form of Central Bank Digital Currency. Central banks across the globe are keeping a close eye on developments in China.

The Empire Strikes Back

Let’s get one thing straight immediately: central bank digital currencies are not crypto-currencies.

They are simply a digital form of fiat money.

The first question that comes to mind is: isn’t money already “digital”? In today’s world, the use of physical cash is all but obsolete, at least among us law-abiding folk.

Indeed, the growth of the digital world in the last couple of decades has been no less than astonishing, and quite frankly head-spinning. It’s difficult to comprehend that Facebook was conceived by uni students in 2004, listed on the stock exchange in 2012, and is now one of the world’s biggest companies at a market cap of US$1trn, with some 2.8bn active users across the globe.

In 2009, bitcoin was launched. The intention of crypto-currencies is to bypass traditional commercial and central banks in financial transactions. Cryptos have not been the only banking system “disruptors”. Witness the startling growth of buy now, pay later services in just the past couple of years. All digital, of course.

In short, central banks have become increasingly concerned that such developments, coming at such a breakneck speed, threaten to undermine the role and control of a central bank. At this pace, central banks are set to lose complete control of the global monetary system.

While that’s a major issue, it’s not the only issue.

Digital payment systems are leaving third world countries, and the poor among first world countries, behind. Then there is the issue of stability. We’ve witnessed the wild ride crypto values have taken over recent years. And we’ve seen that so-called “stablecoins” may not be so stable after all, given dubious backing, as is the case with tether above.

We’ve witnessed bitcoin becoming the preferred currency of ransomware criminals, with ransoms disappearing into peer-to-peer anonymity.

The attitude of central banks is now not so much one of “if you can’t beat ‘em, join ‘em” but rather a case of dragging back the control of money.

So what, then, is a CBDC”?

CBDCs will differ from the account-based electronic money that’s been with us for decades. While not “cryptos”, CBDCs will still be a form of blockchain-based, tokenised digital money.

In a token system, notes Morgan Stanley, a CBDC would be a “bearer asset” which would preserve anonymity and most closely resemble cash. In the existing account-based system, transactions are recorded on a ledger to verify ownership. Central banks will opt for an account-based system but on a centralised ledger at the central bank.

In short, a CBDC will allow you, the everyday punter, to open an account directly with the central bank.

But there is one small problem. In the current system, the central banks deal only with a country’s banks, which are the intermediaries between the controller of the currency and everyday punters. In other words, banks would be no longer be of any use under a “one tier” CBDC system.

So a “two-tier” system is assumed, in which CBDCs coexist with traditional banking system intermediation. But that does not mean traditional banks won’t notice any difference.

Morgan Stanley suggests banks will face competitive pressure on three fronts. Firstly, if consumers are allowed to deposit money directly with the central bank, commercial bank deposits could shrink. Secondly, the technological infrastructure of CBDCs will make it easier for new entrants into the digital payments space without having to rely, as they do now, on an arrangement with a commercial bank.

And thirdly, privacy safeguards offered by CBDCs will mean banks have to compete harder to access consumer spending data. As we know, today’s commerce is all about data.

Citi suggests crypto trading and custody could become a new source of revenue for financial institutions. There would be a certain irony in trading crypto through a very institution crypto was intended to bypass. Citi also notes CBDCs could result in more efficient and targeted monetary and fiscal policy implementation.

CBDCs will serve to protect central bank monetary sovereignty and at the same time create a public infrastructure for digital currencies, says Morgan Stanley, which would mitigate stability risks and achieve greater financial inclusion.

CBDCs would also provide the foundation for bringing the latest innovations in digital payments to the broader public in a safe and reliable manner.

On the Move

Morgan Stanley notes that as of April, 86% of the world’s central banks were exploring the issuance of CBDCs. The PBoC has led out, but the ECB will soon release the findings of public consultations and could soon announce an intention to launch a digital euro.

In the US, the Fed chair has called a digital dollar “a high priority project”, with the Boston Fed soon to release its initial research.

The RBA is also looking into it.

Beyond the developed world, Cambodia, of all places, was an early mover in digital money, albeit not strictly a CBDC. Last year the National Bank of Cambodia launched its Bakong payment system, which provides a common platform for commercial banks, microfinance institutions and payment service providers to deliver e-wallet and money transfer services to consumers without the need for a bank account.

Up until now, notes DBS, only 5% of Cambodians had a bank account.

Which highlights another aforementioned benefit of CBDCs – including the world’s poorest consumers into a cashless world.

China’s smartphone venders, notes DBS, dominate about half the global mobile phone market due to their competitive pricing and attractive product range. By pre-installing a digital wallet into mobile phones, the digital yuan could be exported overseas more efficiently.

Africa, for instance, is well positioned for the rapid adoption of the digital yuan given the “huge” penetration of Chinese devices on the continent. African individuals and businesses have already adopted crypto-currencies for transactions with other regions, despite crypto volatility. Cryptos might be volatile, but so too are African currencies, making it difficult and expensive to conduct business in US dollars.

The yuan, given its stability, could be integrated into Africa’s payment ecosystem that is increasingly dominated by Chinese companies, says DBS.

Or warns DBS, one might conclude.

The Future?

Who knows? We are on the cusp of a new phase in the Digital Revolution.

But the question must be pondered: will bitcoin ultimately prove to be a flash in the pan? Aside from other issues, from price volatility to criminal usage, the environmental impact of crypto mining remains arguably the biggest hindrance.

And if CBDCs move in on the crypto-currency world, will they force cryptos out?

Of course, cryptos are not all about currency. As the prior article in this series explained, crypto “tokens” are also being used in everything from artworks to financial contracts, creating “decentralised finance”.

Ethereum is currently the main player in this space, despite also providing a crypto currency – ether. But Ethereum is also moving from a bitcoin-style proof-of-work model to a proof-of-stake model which eliminates the need for crypto mining, and thus the environmental impact.

Analysts foresee a great future for decentralised finance, or “DeFi”. Central banks and regulators may not.

There is one thing we can be sure of, nonetheless. Crypto-currencies came to be as a result of the invention of the blockchain ledger system. No one is criticising blockchain – on the contrary. The way things are going, all business will eventually shift to blockchain from the old accounts-based ledger systems.

Beyond that, as I said, who knows?

Part 1: Bitcoin: What's That All About? (

Part 2: Bitcoin Versus Gold (

Part 3: Beyond Bitcoin: Ethereum And DeFi (

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