Centralized stablecoins may be doomed

Over the last couple of years, we have seen a lot of interest from central banks and governments in the stablecoin market. The reason behind it lies in the development of central bank digital currencies, or CBDCs.

The idea of issuing a digital alternative to cash is a great motivator for central banks. It allows them to gain more control over the transition and processing of cashless transactions, which are currently overseen indirectly through private payment processors and banks.

Related: Did CBDCs affect the crypto space in 2020, and what’s next in 2021? Experts answer

There have been a number of pilot CBDC projects and initiatives already launched by several central banks, and more are about to come. It is important to note, however, that CBDC has nothing to do with cryptocurrency or known stablecoins in the crypto community — they are not intended to be heavily used in trading; some of them will not be even traded for crypto. CBDCs are a mere digital alternative to cash, fully controlled by central banks.

Related: Central bank digital currencies are dead in the water

CBDCs and stablecoins

A reasonable question arises: If CBDCs and centralized stablecoins solve different market needs, why can’t they coexist? In principle, they could, but at a very high price for the latter.

When it comes to exercising control over money in any form, central banks are quite strict and straightforward — if you want a piece of it, you need to be heavily regulated. As central banks enter into the digital currency world, they will apply the same principles to any existing market participant.

A great example of this approach can be found in a bill introduced to the U.S. Congress in late November 2020, called the Stablecoin Classification and Regulation Act of 2020. According to the bill:

  • A stablecoin can only be issued by an insured depository institution that is a member of the Federal Reserve System.
  • In order to issue stablecoins or provide any stablecoin-related services, a…

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