13626 International Banking Regulation and Policy Assignment Sample
CENTRAL BANK DIGITAL CURRENCY IS A REGULATORY SOLUTION TO THE THREAT POSED BY PRIVATE STABLECOIN
Introduction
Stable coins are crypto currencies that are utilized for reserving of assets like gold that are not issued by Central Banks. Central bank digital currency is a form of digital money that is backed by Government. Central bank digital currencies are similar to stable coins that are crypto currencies and tend to maintain value that is similar in nature. CBDC are representative of existing fiat money in digital formats and have a specified model amongst themselves. Central bank issues CBDC as a legal tender for transactions while paying employees or buying goods and services. On the other hand, stable coins are crypto currencies that are used for pegging values of markets with certain references that are external in nature. Stable coins can also be referred to assets that are digital in nature and have huge stability just like fiat currency and provide utility and mobility services of a crypto currency.
This study that has been undertaken would address both advantages and disadvantages of central bank digital currency along with advantages and threats associated with stable coin. This study would also further shed light on impact of Central Bank Digital Currency on threats imposed by private Stable coin. Finally this study would highlight important conclusions that were derived during this conduct of the entire study.
Background of Central digital currency
Central bank digital currency (CBDC) can be termed as fiat money that is digital in nature and is constantly supported by Government. This is issued by central banks of a country that are tied to national currencies. CBDCs are similar to stable coins where pegging of crypto currencies is done against fiat money for maintaining values that are similar in nature. As commented by Fernández-Villaverdeet al. (2021), CBDC are a representation of existing fiat money in digital formats and work in a way having a model present within themselves. CBDCs that are offered by central banks are used as legal tenders amongst transactions so that employees can be paid and also used for buying of goods and services. CBDC also enables sending transactions from one point to another at a fraction of a second without need for passing through any multiple banks that takes a huge time.
CBDC has capability for bringing in strong reinforcements in money of central banks and also ensure that cross border payments are strengthened. CBDC are also capable of supporting payments that are initiated by Governments so that every agent present in the economy could be easily reached. As stated by Bindseil (2019), it can be implied that CBDCs are capable of offering resilience and reducing costs that are associated with private forms of digital money. CBDC tends to act as a digital form within currency that is legal in nature and is used within a country for avoiding presence of private currencies. It can also be referred to as digital tokens that are similar to crypto currencies that are issued by a central bank in a country. Governments present within nations are planning to launch CBDCs that would be backed by technology of block chains problems amongst digital currencies can be removed.
Background of Stablecoin
In this era of digitization, cryptocurrencies are common as the world wants to go cashless. Digital tools and technologies are taking over the world and several aspects of it. Financial transactions are also being digitised and cryptocurrencies are used to reduce use of cash. Stablecoins are digital currencies or a form of cryptocurrency that are linked to stable assets and aim at reduction of volatility in the market (Dell’Erba, 2019). As an example, stable coins can be pegged to U.S. dollars or gold as well. Many stablecoins are privatised so that private companies are able to stabilise their financial value by eating their currencies into assets. Private stable coins are safer to be used when compared to any other form of cryptocurrencies as those are not pegged. For example, use of cryptocurrencies such as bitcoin can lead to cyber threats and financial crises. However, stablecoins are not transparent and do not provide necessary information to their users. As a result, private stablecoins can lead to tracking issues and financial crises can be faced by owners of these stablecoins. Major advantages of stable coins are that they are stabilised as they are pegged to any other form of cryptocurrency, fiat currency and trade commodities as well.
As a consequence, it can be stated that the value of a stablecoin is determined by the asset to which it is pegged. Change of value of a commodity or a cryptocurrency can destabilise value for stablecoin as well. Therefore, stable coins are not actually stable in their value and can lead to financial risks as well. There are several threats of using private stable coins and the major issue is that they are not subjected to government intervention (Eichengreen and Viswanath-Natraj, 2022). Vulnerability of peg directly creates destabilisation of stable coins and these forms of cryptocurrencies are not safe to be used in financial transactions as they are subjected to market destabilisation. Since the value of a stablecoin is collateralized by other forms of cryptocurrencies, volatility in collateral banking can lead to destabilisation of peg. As a result of destabilisation of peg, market volatility shall also be increased and it proves that stablecoins are actually not stabilised in their value and is dependent on the assets to which it is pegged. However, there are certain stable coins that are not pegged to an asset but are controlled by algorithms. Seigniorage-style stablecoins are safer than other forms of stablecoins and are not pegged to any asset and their value is stable as well. However, such coins have complex algorithms and their controlling process requires technical professionals.
Critical analysis of Central Bank Digital Currency as a regulatory solution
Central bank digital currency has several advantages as it is issued as well as regulated by monetary authority of a nation. Since these virtual notes are regulated by national authorities, chances of fraud are minimal and they can be used as regulatory solutions to challenges imposed by private stablecoins as well. Moreover, it can also be stated that central bank digital currency is authorised by the Central Bank and has limited security concerns when compared to stable coins. As a consequence, CBDCs encourage financial inclusion as it is easier to track it. However, it must be said that it is hard for these virtual currencies to gain global adoption and that may lead to instability of the financial market. It is commented by Bindseil (2019), that widespread adoption is limited as central bank digital currencies are controlled by central government only and privacy of users might not be satisfactory. Bank of England is one of the oldest central bank that aimed at management of reserves and traditional monetary system. Establishment of modern system of currency, stablecoin puts pressure on traditional banks and pressurises it to develop its own digital currency. This type of digital currency simplifies implementation of fiscal policy as well and it reduces flexibility of monetary values. Anonymity of currency is also prevented by this form of digital currency and it makes financial transactions faster and more secure. Similarly, one of the major advantages of using central bank digital currency while conducting financial transactions is that it is cheaper and can be used by everyone without any fear of security breaches. A country’s economy can be developed and stabilised by use of central bank digital currency as it reduces risk of collapse of commercial banks as it allows users to directly connect to central banks (Smith et al. 2021). Since, the central bank digital currency is in full control of central banks, as long as the central bank is safe, customers’ money is also safe. Therefore, this virtual currency can be used to solve potential threats of stable coins that aim at reducing instability in financial markets.
However, one must understand that these types of virtual currencies can enjoy competition between central and commercial banks which may indirectly enhance financial stabilisation. After this pandemic of covid-19, economic instability has risen and countries are facing severe crises on financial grounds as a consequence, use of central bank digital currency can assist developing as well as developed countries to become financially inclusive. This mode of digital currency is secured as it is a virtual form of bank note and aims at conducting secure financial transactions. Henceforth, CBDC can be used as a regulatory solution to a number of threats of stable coins aimed at destabilising economic conditions of various countries. Utility of these virtual currencies can be done in business as it is accepted as legal tender and is linked to fiat currencies as well. Since central bank digital currency adheres to national laws and guidelines, it can be a regulatory solution as well that can resolve issues of privatised stablecoins (Fantacci and Gobbi, 2021). The major disadvantage of using central bank digital currency is that consumers may rely highly on central banks. Such reliance on central banks can reduce the customer base of commercial banks as power of regulation and authorization of the digital currencies is completely in the hand of central banks. As a consequence, commercial banks of a nation may face a downfall which can have an adverse impact on the economic stability of a country.
On the other hand, it must be stated that stable coins are subject to illicit activities. However, central bank digital currencies are recorded on digital ledgers and government authorities can track fraud or illegal activities which protect these virtual notes from being tampered with or manipulated by unethical hackers (Bordo, 2021). Therefore, it is analysed that CBDC is safer than stablecoins and it can be used as a regulatory solution against it. However, digital currencies are fully controlled by the central government and any private company or individual user can face privacy issues while using these currencies. In comparison to stable coins, central bank digital currencies are safe and are secured from fraud activities when they are used to conduct online financial transactions.
Critical analysis of use of stablecoin and threats imposed by it
Stablecoins are cryptocurrencies that are pegged to an asset and as a result, its value is somewhat stable compared to any other cryptocurrency that is not rigged. Pegging of stable coins to assets such as trade commodities or other forms of cryptocurrencies makes them subject to change as the value of the asset changes (Ante et al. 2021). Therefore, pegging is not the ultimate solution; rather it subtracts these settable coins to change in market value as well. As a result, regulatory solutions are required to mitigate issues of stablecoins. Moreover, one needs to understand that stablecoins are pegged to assets and value of stablecoins are connected with waste value, bot owner of stablecoins have no control over the actual asset, as result, privacy of user is invaded and their uses no guarantee that stablecoins will have a stable value in future. Private stablecoins are issued to traders and they are allowed to use it for investment. Traders gain stablecoin in exchange for real money from stablecoin issuers. Problem arises when stablecoin issuers also do not have direct link to assets to which value of stable coins are pegged. As a consequence, fraud and illicit activities are common and consequences will be faced by traders (Chaumet al. 2021). Therefore, solutions and regulations are required that can maintain transparency in this process and users of stablecoin can have direct hand over assets to which their stablecoin is pegged.
Stable coins lack authentic documentation and as a result, when a trader claims his money, lack of documentation and legal papers lead to financial crisis. Third party intervention is required in private stablecoin and it encourages cyber hackers to manipulate privacies of stablecoin users. Lack of government regulations on stable coins leads to several cyber issues as well. Therefore, consumers and traders all over the world are not satisfied by using these stablecoins as they are not aware of the transparency of stablecoins and the process that is used to maintain the value of stablecoins (Mitaet al. 2021). Stablecoins were brought to maintain market volatility, however, it is enhancing market crisis by industry cyber crisis and fraudulent activities. Stablecoins issues are being fined as it does not provide relevant information to its users. Similarly, it is analysed that as the cryptocurrency market grows, prices of these currencies will be less volatile and the requirement of stable coins will reduce. Stable coins were developed to reduce market vitally but growth of bitcoins can reduce market volatility and relevance of stablecoins will become laser with time therefore, keeping future crises in mind, traders are reluctant to use privatised stablecoins.
However, compared with other cryptocurrencies, stablecoins are much more efficient and are a convenient means of exchange. Savings can also be done in airlines as it has a stable value and its value fluctuates only when assets linked with it are subject to change. It can be stated that stablecoins can be used as an alternative to fiat money in developing countries that are not stablecoins (Kamal, A., (2021). During the period covid-19, not only developing countries but developed countries are also facing issues in maintaining their economy. As a result, stablecoin can be used as a mode of exchange and conducting financial transactions to stabilise their economy. Similarly, stablecoins can be sued for providing salaries and pensions to employees and ex-employees. Financial stability of the nation can be gained by use of stablecoins and market volatility can be reduced as well. However, major threats of stablecoins are related to the fact that they are pegged to unstable assets. Moreover, transparency of stablecoins needs to be maintained so that traders and users can gain confidence in using them and they can gain information about value stabilisation of these digital tokens which can assist them to predict the stability or instability of privatised stablecoins.
Stablecoins are limitless virtual coins but it has only one central controller and users have to rely on that control which leads to accountability issues. Several threats are imposed by private stablecoins as they can be easily acted by cyber hackers. Since stable coins are pegged to assets and algorithms, it is easier for hackers to manipulate such algorithms and track stable ions. Therefore, government regulations are required and central bank digital currency can aim at regulating stations and their value to provide accountability and transparency to customers as well (Claeys and Demertzis, 2019). However, a solution to save stable coins from hackers includes complex algorithms so that they cannot be easily manipulated. As insurance, central bank digital currency can aim at solving the issue of stablecoins baby formulating government regulations to control stablecoins. Privatised stablecoins have several risks and steps must be taken to provide authority to the government body to control stable houses which can significantly stabilise the value of stablecoins. If stablecoins are owed to assets that are bought by the government, then traders can also use it for safety.
Discussion of impact of Central Bank Digital Currency on threats imposed by private Stablecoin
Stablecoins were developed so as to reduce market volatility that was created by cryptocurrencies such as bitcoins. Private stablecoins have several issues that enhance privacy concerns among users and require regulations and legal policies to stabilise them in the market. In this era of pandemic, when nations are facing severe economic crises, it is hard for trades to accept stablecoins as it has so much fraud and illicit activities attached to them. Moreover, lack of government intervention in stable stablecoins is not encouraging traders to sue private stablecoins as it is subject to cyber risks. As stated by Bode et al. (2021), four-fifths of central banks are engaged in activities related to central bank digital currency. As a result, stablecoins must also be pegged to digital currency to assist the government in managing the value of stablecoins. However, other than central bank digital currency, prepared stablecoins are also being used to enhance market flexibility. These stablecoins were developed to replace unstable cryptocurrencies and enhance financial stability of developing as well as developed economies. Central banks are pressured to develop their digital currencies as they can see their customers rely more upon stablecoin. As a result, the traditional form of cash and its use in daily life of citizens is getting reduced which is creating a threat for central banks as the sole currency regulator is diminishing. The current scale of stablecoins aims at enhancing the scope of emerging economies by encouraging investors to invest in the form of digital currencies. Stablecoins are scaling rapidly and its growth can have a positive impact on the economic system of the world. There are no such standards to assess composition of stablecoin reserves and their assets. Information regarding stablecoin reserves is publicly available and anyone can analyse the issuer’s reserve. Reserves and assets of stablecoins differ in magnitude of riskiness as they are virtually held as deposits in U.S. Treasury bills, commercial paper, corporate bonds and diverse forms of digital assets.
As more and more cryptocurrencies are being adopted by nations and their traders, the relevance of stablecoins is reducing. With passing time, market volatility is reducing and as a result of excessive adoption of bitcoins, digital tokens or stablecoins are not used significantly. However, it is analysed that the central bank digital currency can mitigate threats imposed by stablecoins by regulating its value and pegging value for stablecoins to digital currency. As digital currencies are issued by the central bank, if stablecoins will peg their value with the central bank digital currency, the government can control the value of stablecoins and traders can use it with confidence (Boar et al. 2020). Similarly, pegging of stable coins with central bank digital currency can allow starbase to be controlled by the central government and not by private companies. Traders and individual users can use stables for financial transactions of personal and commercial use and economic instability of the market can also reduce. It can be analysed that if central bank issue digital currency, some of their issues and pressure will be resolved. However, stablecoin has a pegged value and users can rely on it for conducting transactions. However, central bank digital currency will not be able to peg its value and it will not attract customers at a significant level, when compared to stablecoin.
Stablecoins are mainly pegged to four major assets and they are Precious metals such as gold, other forms of Cryptocurrencies, Oil and Diamonds. However, all these states can have a change in value which enhances market volatility and the major aim of stablecoins to maintain volatility of the market is not fulfilled. Therefore, it is commented by Dell’Erba (2019), stablecoins need to be pegged to such as that is regulated by the government and can deploy legal implications on its financial translations. Pegging of central bank digital currency is a way through which instability of stablecoins and their values can be managed (Viñuela et al. 2020). Government intervention is required in private stablecoins so that their avenue can be maintained and traders can gain confidence in using it for personal or commercial purposes. Moreover, steps need to be taken so that users can have clear ideas about the rise or downfall of assets that are being pegged with their stablecoins. Market volatility needs to be analysed by the use of stablecoins and the government can use central bank digital currency as a regulatory solution to reduce threats that are imposed by privatised stablecoins. Retail banks balance sheet can face adversity due to stablecoin reserves and problems can be faced in maintaining closing and initial balance as well.Bank deposits and assets are getting substituted by stablecoin which is a threat for central bank and this issue can be resolved if central bank develop its own digital currency.
There are limited monetary policies that can regulate stablecoins and can protect users from facing a crisis due to cyber hackers, financial transactions that are done with stablecoins are not safe and it can lead to issues and financial crises. Many business organisations use stablecoins for investment and savings. However cyber crisis and availability of algorithms to cyber hackers make stablecoins unsafe for users. As a consequence, central bank digital currency can be used to replace stablecoins as such digital currencies are regulated by government authorities and are not subjected to high levels of market crisis. Cyber hackers aim at hacking stablecoins and gaining financial advantages, however, pegging of stablecoins with central bank digital currency can reduce cyber hacking. Similarly, central bank digital currency can be easily tracked which help users to analyse cyber hackers and cancan punish them as per legal regulations. Stablecoins are privatised which does not allow government regulations to protect it and track them. The pegging of CBDC with stablecoins can reduce issues of financial crisis and cyberthreats (Klein et al. 2020). Similarly, traders and individual users can use these coins for savings and investment purposes as they are sure about the reliability of stable coins that are pegged with central banks digital currencies. Government regulations must also aim at maintaining transparency and accountability with its users and encourage use of stablecoins to enhance financial stability. In post-covid era, stablecoin can stabilise developing economies if they are pegged with reliable assets and regulations and legal implications are deployed on financial transactions done by stablecoins.
Conclusion
Overall, it can be concluded that both central bank digital currency and stablecoins have certain risks. However, digital currencies that are regulated by central banks are much safer to be used in financial transactions compared to bitcoins that are subject to change in value. Stablecoins are actually not stabilised in their value, rather they are highly dependent on the asset and its value to which it is pegged. Therefore, being a central government issued currency; central bank digital currency can be used as a regulatory solution to threats that are imposed by stablecoin. Private stablecoins have privacy issues as there is lack of transparency and complexities are faced while tracking it. As a consequence, CBDC can be a possible solution as it is legalised and safer from illicit as well as fraud activities. Stablecoins are pegged to assess that they can have a flexible value, rather stable coins must be pegged to digital currencies that are handled and regulated by the central government. Henceforth, transparency issues need to be resolved as well and regulation of stablecoin can be done by the central government. Confidence can be gained by traders when stable coins are pegged with central bank digital currency, rather than any other privatised asset. Therefore, it can be analysed that central bank digital currency and deployment of government regulations can be the best possible way of resolving threats that are imposed by privatised stablecoin.
References
Ante, L., Fiedler, I. and Strehle, E., (2021). The impact of transparent money flows: Effects of stablecoin transfers on the returns and trading volume of Bitcoin. Technological Forecasting and Social Change, 170, p.120851.
Bindseil, U., (2019). Central bank digital currency: Financial system implications and control. International Journal of Political Economy, 48(4), pp.303-335.
Bindseil, U., (2019). Central bank digital currency: Financial system implications and control. International Journal of Political Economy, 48(4), pp.303-335.
Boar, C., Holden, H. and Wadsworth, A., (2020). Impending arrival–a sequel to the survey on central bank digital currency. BIS paper, (107).
Bode.D.I., Higginson, M and Niederkorn,M. (2021). CBDC and stablecoins: Early coexistence on an uncertain road. [online] Available at: https://www.mckinsey.com/industries/financial-services/our-insights/cbdc-and-stablecoins-early-coexistence-on-an-uncertain-road [Accessed on 02.03.22]
Bordo, M.D., (2021). Central Bank Digital Currency in Historical Perspective: Another Crossroad in Monetary History (No. w29171). National Bureau of Economic Research.
Chaum, D., Grothoff, C. and Moser, T., (2021). How to issue a central bank digital currency. Available at SSRN 3965032.
Claeys, G. and Demertzis, M., (2019). The next generation of digital currencies: in search of stability (No. 2019/15). Bruegel Policy Contribution.
Dell’Erba, M., (2019). Stablecoins in crypto economics from initial coin offerings to central bank digital currencies. NYUJ Legis. & Pub. Pol’y, 22, p.1.
Dell’Erba, M., (2019). Stablecoins in cryptoeconomics from initial coin offerings to central bank digital currencies. NYUJ Legis. & Pub. Pol’y, 22, p.1.
Eichengreen, B. and Viswanath-Natraj, G., (2022). Stablecoins and Central Bank Digital Currencies: Policy and Regulatory Challenges. Asian Economic Papers, 21(1), pp.29-46.
Fantacci, L. and Gobbi, L., (2021). Stablecoins, Central Bank Digital Currencies and US Dollar Hegemony. Accounting, Economics, and Law: A Convivium.
Fernández-Villaverde, J., Sanches, D., Schilling, L. and Uhlig, H., (2021). Central bank digital currency: Central banking for all?. Review of Economic Dynamics, 41, pp.225-242.
Kamal, A., (2021). Social: An Algorithmic Stable Coin for Social Influence.
Klein, M., Gross, J. and Sandner, P., (2020). The digital euro and the role of DLT for central bank digital currencies. Frankfurt School of Finance & Management GmbH, FSBC Working Paper.
Mita, M., Ito, K., Ohsawa, S. and Tanaka, H., (2019, July). What is stablecoin?: A survey on price stabilization mechanisms for decentralized payment systems. In 2019 8th International Congress on Advanced Applied Informatics (IIAI-AAI) (pp. 60-66). IEEE.
Smith, A., Tooke, T. and Gilbart, J.W., (2021). Stablecoins as alternatives for central bank digital currency?. Central Bank Digital Currency Considerations, Projects, Outlook.
Viñuela, C., Sapena, J. and Wandosell, G., (2020). The future of money and the central bank digital currency dilemma. Sustainability, 12(22), p.9697.
………………………………………………………………………………………………………………………..
Know more about UniqueSubmission’s other writing services:
Essay Writing Help
Dissertation Writing Help
Case Studies Writing Help
MYOB Perdisco Assignment Help
Presentation Assignment Help
Proofreading & Editing Help
