After years of back and forth among the Indian crypto enthusiasts and the government officials in charge regarding crypto regulations in India, the 2022-23 Budget finally brought some semblance of regulatory guidelines for crypto trading. Along with it, the Budget also announced the possibility of an Indian CBDC (central bank digital currency), for which the pilot has finally started on November 1, 2022.
So now India has the e₹ or the digital rupee, and the RBI has greenlit the pilot programme for the same in the wholesale sector. Nine banks are to participate in this pilot, including the SBI (State Bank of India), the Bank of Baroda, the Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, YES Bank, IDFC First Bank, and HSBC.
India is one of the very first countries across the world to launch a pilot for a CBDC, China being just a little ahead of us in the race. Even as we’re catching up to the rest of the world in terms of technological advancements, you might have the question: ‘what is a CBDC?’ Or if you’re in the know of the crypto world already, you may still have some trouble understanding the difference between CBDCs and stablecoins. In this post, we explore the difference between the two.
What is a CBDC?
The concept of a CBDC or a central bank digital currency is as simple as the expanded version of the acronym- it is a digital-only currency released by the central bank in a country. A CBDC is known as the bridge between fiat, centralized finance and the blockchain-based cryptocurrencies, as they are supposed to bring the best of both the worlds together.
What are the features of CBDC? Let’s find out!
⦁ CBDCs might be blockchain-based like usual cryptos.
⦁ Central bank digital currencies will offer the transparency regular blockchain-based cryptocurrencies have when it comes to transactions, the processing of funds, and the participants involved in said transactions.
⦁ CBDCs might also offer the privacy and anonymity that crypto users can have upon a blockchain ledger.
⦁ CBDCs will have the central bank of a country as the authority in charge. This will bring an added layer of security to what a blockchain has built in naturally.
⦁ CBDCs obviously compromise on the decentralization of crypto, as they’re overseen by a centralized authority.
Admittedly, CBDCs are a way for national governments to get a foot in the crypto space and keep all trading activities in check by driving most of the digital asset-related operations into being done through central bank digital currencies instead. But they do still bring a good method for crypto traders to convert their crypto into fiat and vice versa. Additionally, CBDCs are an excellent way for the general populace who are yet wary of crypto to get into blockchain-centric trading.
As the central bank put it in a statement when speaking of the digital rupee, “Use of e₹-W is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.”
So that was a brief introduction into CBDCs. However, why are they compared with stablecoins? And what are similarities and dissimilarities when it comes to stablecoins vs. CBDC? We’ll now get into that.
Stablecoins vs. CBDC: Similarities between stablecoins and CBDCs
Stablecoins are virtual assets that are quite similar to cryptocurrencies, except for the fact that they have their values pegged to another asset- be it a real world one or another cryptocurrency. Tether (USDT) is a good example of a stablecoin that has its value attached to that of the US dollar at a ratio of 1:1. Therefore 1 USDT = 1 USD in terms of value.
CBDCs, on the other hand, are of course digital assets backed by a country’s central bank, like the RBI in India. Instead of being pegged to another asset, they’re actually themselves recognized as legal tenders in a country.
What are the points of similarity between the two? Let’s see for ourselves:
⦁ The blockchain technology that underlies both assets.
⦁ The volatility of usual cryptocurrencies does not affect either central bank digital currencies or stablecoins, as both have other assets backing up their values (or more accurately in the case of CBDCs, they are a kind of fiat currency themselves).
⦁ Both are well regulated- by auditing companies in case of stablecoins and by central banks when it comes to CBDCs.
Stablecoins vs. CBDC: So, how are CBDCs and stablecoins different?
Unlike CBDCs, stablecoins are still launched by private institutions, and therefore they can be banned by a country’s regulatory body. However, with CBDCs, there is no risk of all your investments vanishing overnight.
Other aspects that differentiate stablecoins vs. CBDC includes the fact that while stablecoins like the USDT can be exchanged at any point for a dollar, CBDCs have no assets backing them in a similar way. So, their value is actually quite widely controlled by the central bank of a country, just like fiat currencies.
Stablecoins can be used for cross border payments and international investments, but CBDCs cannot be used as easily in cross border transactions especially if a government or organization doesn’t accept that particular currency for trade. CBDCs are only as powerful as the fiat of their respective country.
Conclusion:
We do hope this post has helped you understand the debate of stablecoins vs. CBDC, and how despite seeming similar, the two are completely different things.
With the digital rupee pilot launch, as an Indian crypto enthusiast, all you can do now is wait and watch how successful the government-controlled CBDC proves to be. Once the e-rupee does actually work out, the way for positive crypto regulation in India might just have a lot less obstacles.
Interested in crypto trading in India? Give WazirX website a visit today to find out how!
Disclaimer: Cryptos are unregulated virtual assets, not a legal tender and subject to market risks. The views and opinions expressed in the article are those of the author(s) and don’t represent any investment advice or WazirX’s official position.
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