Stablecoins backed by CBDCs?
Stablecoins are most commonly backed by fiat currency, cryptocurrency or real-world assets. Yet CBDC-backed stablecoins may become a reality in the not-too-distant future.
Stablecoins are most commonly backed by fiat currency, cryptocurrency or real-world assets. In rare instances, some are purely backed by an algorithm. Private stablecoins are also often seen to be in opposition to central bank digital currencies (CBDCs).
Yet, as the cryptocurrency space continues to grow and innovate, talks have emerged of the two opposites working together, and CBDC-backed stablecoins may become a reality in the not-too-distant future.
The Hong Kong Aurum Prototype
An example of this new kind of stablecoin has already been developed in Hong Kong. On October 21st the Hong Kong Monetary Authority presented its completed ‘Aurum’ retail CBDC prototype. The name Aurum derives from the Latin term for gold with the initial experiment being labelled as ‘private and flexible’ for retail users. Over 100 jurisdictions are already putting proposals together for a version of their own.
A CBDC implies that a central bank would be the issuer of the digital currency. However, in the trial that Aurum conducted, instead of giving users direct access to a CBDC they provided a private stablecoin backed by the CBDC itself. This is akin to how card payments use bank money, which in turn is backed by central bank guarantees.
Hong Kong and Aurum have been the pilots in this new innovative process as CBDC-backed stablecoins have never been done before and with most believing that the two separate entities cannot co-exist.
Are CBDC stablecoins the future?
Within the CBDC backed stablecoin’s KYC (know your customer) process, only the intermediary could see the identity of a user as the transactions themselves were conducted under an alias. With privacy (or lack of) playing a huge role in both CBDCs and in stablecoins, encryption and anonymity are integral to something like this working fluently.
Stablecoins are, at present, widely accepted and used internationally while CBDCs aren’t anywhere close. China’s digital Yuan, currently the most widespread version of the technology, has had 70 million transactions since its launch. With BIS and Hong Kong working towards a 2025 target, it seems to be a long way away before they reach a comparable level.
If they do end up co-existing and this in turn provides a strong use case for CBDC-backed stablecoins then many countries and jurisdictions will most probably look to follow the blueprint laid out by the BIS & Hong Kong experiment.
You can find out more about Poundtoken’s own reserves for the GBPT stablecoin here. For more information, visit our complete guide to stablecoins.
