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Fabricius Zatti | Nov 15, 2023
As decentralized finance grows in popularity there’s an increasing demand for digital currencies that can be used for cross-border and domestic payments. This is especially true during uncertain times like we’re seeing now. As inflation rises, people are looking to CBDCs and stablecoins (cryptocurrencies with a stable price, tied to an existing asset, usually fiat currency) to act as a dependable way to make retail payments and let unbanked individuals gain secure access to the global economy.
So how close are we to seeing widespread stablecoin and CBDC adoption? Let’s take a look.
The launch of stablecoins for domestic and cross-border payments with the potential to reach a global scale might have initially been perceived as a risk to financial stability or a threat to banking systems.
But the increasing adoption of stablecoins like USDT and USDC used for cross-border payments and remittances by a large number of users in different countries is already providing benefits to the financial system and the broader economy. And regulations have been playing an important role in allowing those potential benefits while containing associated risks for the financial system.
To this point, some banks have become more open to the benefits of stablecoins as their adoption helps them increase their performance, speeding up the settlement processes. Stablecoins can allow banks to have instantaneous payments, operating 24/7.
From an operational efficiency perspective, stablecoins also offer the potential to reduce transaction and security costs. And from an innovation outlook, banks that are exploring stablecoins now can gain a first-mover advantage in the space.
Additionally, stablecoins can increase security in transactions by preventing money transfers into accounts that have not undergone KYC (Know Your Customer) process and are potentially participating in illegal activities.
The decision depends on whether a bank pursues to launch a closed-loop or an open-loop stablecoin. When issuing tokens on the Stellar network, for example, the issuer can choose to enable “authorization required”, meaning an issuer must approve an account before it can hold or transact with their asset.
Conversely, other banks remain hesitant to enter the stablecoin space, either because of interoperability concerns or because of a lack of clear regulation. While the recent collapse of UST and Luna accelerated the importance of stablecoin regulations, policymakers warned banks to keep their distance from stablecoins.
And during the collapse, though many private stablecoin issuers said they were not affected and people could still redeem USDT for $1 on Tether.io, USDT lost its peg for a moment with a price as low as 96 cents on Coinbase – demonstrating that even fiat-backed stablecoins have potential instability.
Today’s global financial system is more complex than ever before, yet as the world’s economy grows the infrastructure they rely on needs to evolve. Every nation has its own, independent monetary policy and regulatory standards. But with varying system access and legacy technology, the world’s financial infrastructure can seem overwhelming.
To this point, blockchain is enabling governments and central banks around the world to create new, high-performance financial infrastructure. With Central Bank Digital Currencies (CBDCs), national currencies can leverage modern technology, becoming secure, centralized, and scalable. All while allowing central banks to direct monetary policy in more efficient and effective ways.
A recent Global CBDC Index from PwC showed that 80% of central banks are considering or have already launched a CBDC. Central banks all around the globe are already exploring CBDCs, with different technologies, and piloting specific use cases in their nation. In general, central banks do not seem to be open to issuing their CBDC on public networks because they want to maintain tight control and oversight of the asset.
In November 2021, Nigeria launched the eNaira, designed to complement Nigeria’s physical currency. Nigeria has a population of about 200 million, and it is the largest economy in Africa with a gross domestic product of about $430 billion.
It is estimated, however, that around 40% of the population doesn’t have a bank account, including 59 million unbanked adults, a matter that the central bank intends to tackle with the CBDC. The eNaira app has been downloaded 840,000 times, has 270,000 active wallets, and has been used for nearly $10m worth of transactions. This CBDC was developed by the fintech company Bitt, using the Hyperledger blockchain, an enterprise blockchain designed for business application developments.
In 2019, Wells Fargo announced plans to pilot an internal settlement service called Wells Fargo Digital Cash. It would run on Wells Fargo’s first enterprise distributed ledger technology (DLT), allowing them to complete internal book transfers of cross-border payments. The company did a demonstration and was able to move value between the U.S. and Canada.
Also back in 2019, JP Morgan became the first major bank to design its own stablecoin (JPM Coin) to facilitate instant payments using blockchain technology. Currently, the JPM coin is only accessible to JP Morgan’s corporate and institutional clients who have passed the KYC process. It’s applied for 24/7 cross-border payments, and it isn’t traded on any crypto exchange.
To complete the analysis of the top 3 banks in the US, Bank of America is not developing a stablecoin. But recently some analysts stated that the United States will continue to move forward to create its own CBDC, expecting stablecoin adoption and uses for payments to increase significantly over the next several years.
In 2020, the German bank Bankhaus von der Heydt (BVDH) launched EURB, a Euro stablecoin on the Stellar network. BVDH bank has been focused on becoming a cryptocurrency provider for cryptocurrencies and security tokens and has recently been acquired by Bitmex. The EURB stablecoin is on a closed network and has been on hold because of negative interest rates and regulatory restrictions.
Earlier in 2022, Riksbank, Sweden’s central bank completed the second phase of e-krona testing. The Swedish CBDC is now technically ready for integration with banks and payment service providers.
During phase 2, the technical tests have included investigating whether and how an e-krona might function off-line with NFC, whether the performance of the tested solution is adequate, and how POS integration worked. The e-krona stablecoin was built on R3’s Corda, a permissioned, peer-to-peer distributed ledger platform. This means that e-krona is not issued on a public blockchain network.
Moving to Ukraine, Tascombank, one of the oldest commercial banks in the country, launched a Stellar-based pilot for Ukraine’s national fiat currency, the hryvnia. The pilot, which is being implemented under the supervision of the National Bank of Ukraine and is supported by the Ministry of Digital Transformation, will test the electronic hryvnia on the use cases of programmable payroll for public employees along with peer-to-peer and merchant payments. Cheesecake Labs is part of the cross-company team responsible for this project, alongside SDF and the fintech Bitt.
When the Russian invasion of Ukraine began in February, the national government posted pleas for crypto asset donations. Currently, more than $110 million in crypto donations have already been raised to support the Ukrainian resistance, including BTC, ETH, and stablecoins. While the banking financial system has been under sustained attack by Russia, using both military and cyberattacks, crypto has proved as a way of giving ordinary people control over their own money to go directly to those in need.
The PBoC is China’s central bank and is responsible for the development of the e-CNY central bank digital currency. The e-CNY was created in 2017 and has been in the pilot stage, continually being rolled out throughout China. The CBDC is currently expanding to 15 out of 31 of China’s provinces and autonomous regions and Chinese consumers have spent a cumulative 264 million transactions amounting to $12.35 billion, or 83 billion CNY.
Though the e-CNY still doesn’t have enough scalability to be widely used, more than 4,567,000 merchants across the country have begun accepting the CBDC. Not surprisingly, China’s central bank is not open to public networks because the e-CNY actually isn’t even a cryptocurrency itself. It doesn’t use a blockchain-based decentralized ledger and instead operates under a centralized system.
In 2020, Brazil’s central bank launched a mobile payment system, called Pix, that allows users to make payments instantly, 24/7, without any cost, through a bank account identifier that can be as simple as an email or phone number.
Similar to the privately owned Zelle in the US, Pix works through multiple apps from banks and other digital wallet services. Less than 2 years later, it’s already been used at least once by 120 million Brazilians and about $89 billion has moved through the network.
As Pix made paying people digitally almost as easy as using paper money, it’s getting more people inside the formal financial system. The launch of Pix was well-timed, as informal work boomed during the pandemic, accounting for 80% of the new jobs added in Latin America’s largest economy in the first three months of 2021.
The central bank is also exploring the creation of a CBDC and announced it chose nine applicants for its CBDC competition, the Real Digital Lift Challenge. The selected use cases cover CBDC applications for IoT, DeFi, real-time settlement of tokenized assets (delivery versus payment or DvP), currency exchange (payment versus payment or PvP), and payment solutions when both payer and payee are offline. Itau, the largest bank in Latin America, will focus on international payments using the PvP method in an application with Colombia.
Banco Santander, the largest foreign bank in Brazil with over 29 million clients, will explore the tokenization of real-world properties such as vehicles and properties. And finally, Mercado Bitcoin, the largest digital asset exchange in Latin America, whose application involves dealing with real-time settlement of digital assets, announced a partnership with the Stellar Development Foundation (SDF) to deliver the solution.
Recently, Itau also announced the creation of a tokenization platform, aiming to democratize investments by fractionalizing real assets and making them available to retail clients. The platform will allow for the representation of regular finance products as blockchain-based tokens, carrying out both the issuance, distribution, and custody of digital tokens as well as the integration with other Itaú products and channels.
It’s clear that stablecoins and CBDCs are major projects that many different players are focusing on — we’re seeing significant progress on both fronts worldwide. Specific use cases like the use of cryptocurrency to support resistance efforts in Ukraine and using stablecoins to better serve unbanked individuals prove just how valuable and revolutionary these technologies can be.
So far, the most significant advances in stablecoins and CBDCs have come from smaller markets so it will be interesting to see when major banks will be more willing to publicly issue CBDCs – and which major bank will lead it in its market.
To learn more about decentralized finance, blockchain technology, and the future of stablecoins and CBDCs, be sure to stay tuned to the Cheesecake Labs blog.
And if you’re interested in developing digital products with blockchain tech, get in touch with our expert developers — we’d love to help you innovate your business!
Jumped drillships to join great friends on their amazing mission, exploring his developer/entrepreneur skills. Loves traveling and can cook a lasagna better than his grandmother.
Fabricius Zatti | Jun 13, 2023