Beginning with the advent of Libra (as it was then known) and more recently following the turmoil in the cryptoassets market and the crash of a stablecoin (Luna), more attention has been brought to regulating stablecoins. In the EU, the Markets in Crypto Assets regulations addresses this through requirements bestowed upon issuers and service providers to ensure that the impact of these events are mitigated. The UK is also set to introduce new rules for stablecoins – initially expanding the scope of Electronic Money Regulations to include stable tokens that reference fiat currency and plans for a wider framework to cover all other cryptoassets later in the year. In the US, some issuers have state licences, but they impose minimal requirements on the stablecoin issuers, and many are calling for more protection of investors in the sector. In contrast, Japan has at the beginning of June 2021 passed a bill that aimed at curbing financial system risks of stablecoins to strengthen the protection of investors.
The benefits of stablecoins include lower costs of financial services, real-time and more competitive payments compared to what consumers and businesses have on offer now. Businesses could benefit from their use as they would allow for quicker and cheaper payments. Moreover, thanks to their accessibility stablecoins technology could bring more people into the market – those unbanked or underbanked segments of population.
Central Bank Digital Currencies (CBDCs) are digital tokens that are issued by a Central Bank representing its own fiat currency on a 1:1 basis. A CBDC is issued, regulated and backed by a nation’s monetary authority or central bank. As such, they are supported by the national authority and influenced by the country’s monetary policies, CBDCS are therefore seen as more secure and less volatile.
Many central banks have introduced pilot programs and research projects to determine the potential use of CBDCS usability in their economy. In the European Union, in June 2022, the President of the European Central Bank has expressed plans to evaluate a potential implementation of a digital Euro. Sweden’s Riksbank recently began developing an electronic version of the e-krona. The Bank of England is in the process of investigating integrating CBDC into its financial system. In the United States, President Biden has recently directed federal agencies to evaluate the infrastructure needed to issue a US-wide CBDC. In India, the central bank has announced that it will introduce a digital rupee by the end of 2023. Finally, some smaller jurisdictions have already launched CBDCs, among others: The Bahamas, Dominica, Nigeria or Grenada, whereas 80 other countries worldwide are adopting projects with the aim to develop their own CBDCs.
There are many reasons why a Central Bank may opt to issue a CBDC and the reason behind this will vary from jurisdiction to jurisdiction. Whilst for some it may be to bank the unbanked or to facilitate faster, cheaper and more efficient financial services. For others, it may be to develop resilience through an additional payments rail or to enable programmable payments.