Binance released its highly anticipated proof of reserves (PoR) on Friday, providing blockchain-based evidence for the Bitcoin on its books. However, many in the crypto community question Binance’s approach, and aren’t fully convinced that they have the transparency they’re looking for. The Move to Proof of Reserves As Binance explained in its announcement, the exchange’s transparency system will add multiple tokens and networks within the next two weeks. For now, it solely validates its Bitcoin holdings. The company’s initial audit…
In a volatile crypto market, developers found a way to stabilize trade. The solution comes from the invention of stablecoins, which entered the market in 2014. Stablecoins are digital currencies linked to an asset or a currency. Some of the most popular assets include gold and fiat currencies. Now, the promise of CBDC currencies can lead this evolution to the next step.
The US Dollar backs the majority of stablecoins circulating the DeFi ecosystem. Therefore, the value fluctuations of digital currency remain at a minimum.
On the other hand, un-pegged high-end digital coins such as Ethereum and Bitcoin are prone to sudden ups and downs. In 2014 Tether was the first stablecoin launched, and since then, other stablecoins have been modeled to fit Tether’s mold.
Types of Stablecoins
Stablecoins attempt to bridge a gap between fiat currencies and digital currencies. Their existence bases operations on working mechanisms, and they exist as:
- Fiat-collateralized stablecoins: Fiat currencies are the most used collateral for crypto coins. These coins maintain fiat currencies reserves such as the Japanese Yen, US Dollar, and Turkish Lira.
- Precious metals-collateralized stablecoins: other cryptocurrencies peg to the precious metals such as gold or silver. In addition, commodities such as oil and petroleum cover bases as collateral.
- Crypto-collateralized stablecoins: these types of coins are collateralized and backed by other cryptocurrencies. Since both cryptocurrencies could be highly volatile, they are hence over-collateralized to ensure stability.
- Non-collateralized algorithmic stablecoins: these coins have no backing reserve. However, they have an operational mechanism like that of a central bank to ensure stability. They implement smart contracts to increase and decrease tokens in circulation according to the demand.
What are CBDCs (Central Bank Digital Currencies)?
CBDCs have emerged in recent financial times. Governments, Banks, and institutions are working round the clock to introduce digital currencies feasible in global markets. Researches by the Bank of international settlement report that over 80% of central banks worldwide embrace CBDCs and are exploring user cases.
Cryptocurrencies are volatile and decentralized in nature. As a result, global governments had no way around the crypto market. CBDCs cover electronic forms of currencies issued by governments’ central banks for a particular region or nation. If and when a country issues a CBDC, economies consider it a legal tender worldwide.
Different Types of Central Backed Digital Currencies
According to target users, CBDCs fall into two preferable classes. On the one hand, there are Retail CBDCs that operate on distributed ledger technologies. They are available anonymously and function all round the clock. Its main agenda serves the general public, additionally reducing costs of printing physical cash.
The second category involves Wholesale CBDCs are an excellent fit for financial institutions. Specifically, they increase payments security and resolve liquidity risk aspects of digital currencies. As a result, wholesale CBDCs should be more popular than existing form of traditional currencies worldwide.
Nationalities Using CBDCs
In early 2017 Swedish oldest Bank started the CBDC pilot project e-krona. In collaboration with Accenture, PLC began in 2020 with an extension into 2022. Consequently, e-krona intends to offer financial alternatives in case of emergency. In addition, governments will use the digital coin to settle private-sector payment struggles to ensure a stable Swedish payment system.
China: Digital Yuan
The Peoples Bank of China developed among the first CBDCs to enter the market. The process of creating Yuan began as research in 2014. Digital Yuan gained global attention in 2020 when China announced testing its CBDC prototype. Yuan’s first trial was in the Luohu district of Shenzhen and, secondly, Suzhou City. As reported Digital Yuan will impact $27 trillion market payments in China.
Bahamas: Sand Dollar
In 2019 Bahamas began its digital CBDC that officially launched in 2020 as Sand dollar. The government of Bahamas deployed the project in two districts, Exuma and Abaco Islands. Furthermore, the sand dollar pegs the Bahamian dollar on a ratio of 1:1. So, digital currency provides payment structures and regulated payments in the country.
Marshall Islands: Sovereign
In 2018, the Republic of the Marshall Islands articulated plans to launch CBDC Sovereign (SOV). In recent times the US dollar has served as the legal tender on the Island. This is because the population in Marshall Island accounts for less than 60,000 people. RMI intends to launch SOV to improve payment methods as a legal tender.
Eastern Caribbean Area: DXCD
The Monetary Authority Organization for the Eastern Caribbean States, known as Eastern Caribbean Central Bank, began the DXCD project. The project plan intends to reach financially excluded parts of the population.
A prototype is currently on trial in Grenada, Antigua, Nevis, and Barbuda. DXCD intends to offer citizens retail payments for those without credit cards and at a low price.
Which CBDC will dominate the market?
Leading global economic states are considering introducing their CBDCs to include the United States and Japan. As of July 2021, more than 81 countries are pursuing CBDCs. However, the likely CBDC dominant is and will be YUAN. The reasons for its success cut across many aspects to include:
- China has the electrical power required to mine cryptocurrencies. Since the early days of Bitcoin adoption, China had mining farms responsible for mining the Bitcoin in circulation.
- China’s population plays a significant role. The people of China stand at more than 1 Billion people.
- China’s economic influence around the globe supports its recent CBDC endeavor.
- China has institutional infrastructures that support crypto payments and adoption aspects on a larger scale.
Closing Thoughts on Central Backed Digital Currencies
Considering the efforts put in place by global governments towards CBDCs, they will be a reality in no time. Introducing CBDCs will increase mass crypto adoption and encourage other nations to make crypto coins legal tender. Moreover, CBDCs will offer financial inclusion for a bank-less underprivileged population.
The formation of CBDCs will fall on any side of the economy. Some nations aim to tame the decentralization nature of cryptocurrencies by introducing CBDCs. Other coins could have a market crash as a result. In the end, global investors can only tell the impact of CBDCs on the general economy once they become operational.