Central Banks Fear Stablecoins More Than Bitcoin — And They’re Right

Key Insights

• Bitcoin is viewed by central banks more as digital gold than a rival to national currencies.
• Stablecoins, on the other hand, are direct competitors with fiat money and are more of a risk to financial stability.
• Central banks are responding to this threat with Central Bank Digital Currencies (CBDCs).

Bitcoin has been a major source of attention from policymakers and central banks since its launch. While many people assume that central banks see Bitcoin as their biggest threat, the real threat in this case is actually stablecoins.

They are unlike Bitcoin in that they directly mimic national currencies. This makes them more dangerous for central banks and their control over monetary policy.

Bitcoin Is an Asset, Not a Currency

Bitcoin is a digital asset, no different from any other commodity like gold, silver, or even oil. Its value comes from scarcity, security and demand, not from a fixed link to another currency.

This is what makes it attractive to investors. However, it is too volatile to serve as a reliable currency like a stablecoin can.

A functional currency must provide price stability, must act as a store of value, and must serve as a unit of account. Bitcoin’s price swings too frequently, making it hard to implement for daily payments. Businesses cannot set prices for goods in a currency that can lose or gain 20 percent in hours. Consumers also avoid using it for savings due to its unpredictability.

Because of this, Bitcoin acts more like “digital gold” or a speculative asset. Central banks are aware of this difference and do not fear that Bitcoin will affect their monetary control since its use is limited.

Stablecoins Are a Direct Competitor to Fiat Money

Stablecoins are different, though. They are designed to work like fiat and are often pegged to the U.S. dollar or another stable currency. Some of the biggest examples include Tether (USDT) and USD Coin (USDC). Their link to real-world fiat makes them a bigger challenge to central banks.

Central banks influence economies by adjusting the money supply and interest rates. This allows them to manage inflation, lending and spending. However, if stablecoins continue to gain ground, this control could weaken.

For example, if a country raises interest rates to slow inflation, people using stablecoins outside the central bank’s control might bypass those policies.

This risk is greater in countries with unstable currencies, where Citizens may prefer to use stablecoins backed by the U.S. dollar. This leads to an issue called “digital dollarisation,” which undermines central banks and reduces the ability of local central banks to manage their economies.

The Bank for International Settlements (BIS) has already warned that stablecoin adoption could cause capital flight and weaken central banks’ ability to act.

Threatening Financial Stability

Stablecoins also create risks for financial stability. For example, if users lose confidence in an issuer, they might rush to redeem tokens for fiat money.

When such a “run” occurs, it forces issuers to sell off assets quickly, which could destabilize markets.

A good example of this happening was the collapse of TerraUSD in 2022, which showed how fragile stablecoins can be. Other stablecoins have also lost their pegs temporarily, which has been a major worry for regulators.

Another source of worry for regulators is an issue called “deposit disintermediation.”

For context, if people start to use stablecoins for payments and savings, they may move money out of banks. This reduces deposits, which banks rely on to provide loans and serve as financial intermediaries.

According to Leaders, like Bank of England Governor Andrew Bailey, private stablecoins could harm a country’s financial stability and weaken national monetary control.

Central Bank Digital Currencies

In response to this threat, many central banks are developing Central Bank Digital Currencies (CBDCs).

A CBDC is a digital version of a country’s currency, which is issued directly by the central bank. They are unlike private stablecoins and carry no credit or liquidity risk (since they are backed by the sovereign authority).

CBDCs allow central banks to offer a payment method that appeals to “digital enthusiasts,”without giving up monetary control. They also make sure to reinforce the “singleness of money,” where all citizens use the same trusted national currency.

Some countries are moving faster than others with this.

China, for example, is pushing ahead with its digital yuan, while the European Union is developing a digital euro. The US is moving more slowly, however, and prefers private stablecoin development.

Overall, Bitcoin is important as a store of value and speculative asset, but it does not present the same risks as stablecoins to central banks. This is why regulators and central banks are focused more on stablecoins than Bitcoin.

Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.