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Charting the Co-existence of Stablecoins and Central Bank Digital Currencies Oxford Law Blogs

Organizations frequently develop altcoins to serve specific business needs within their operations. This includes creating internal payment systems for large enterprises, developing industry-specific tokens for supply chain tracking, implementing reward tokens for customer loyalty programs, and designing specialized tokens for gaming and entertainment https://www.xcritical.com/ platforms. These commercial applications demonstrate how blockchain technology can be adapted to serve specific business use cases. Payment tokens are designed for transactions and aim to function as digital cash. Examples include Litecoin and Dash, which focus on low transaction fees and faster confirmation times than bitcoin.

Bank of England Weekly Report 15 January 2025

  • The best known is JPM Coin, offered by Onyx by JPMorgan Chase, whose clients can use it for transactions such as intraday repurchase agreement settlements and to manage internal liquidity.
  • And holding digital assets will require access to secure custody solutions, either in-house or contracted through a specialty third-party provider that can build robust cybersecurity defenses.
  • Now, many bitcoiners say its scarcity – only 21 million coins can be mined – means it will hold its value and protect investors against inflation.
  • Its governance token gives holders voting rights over protocol development and fee distribution.
  • The feedback obtained will help to shape the design of a digital pound, including the blueprint, our experiments and the assessment, as well as informing the decision of whether to introduce it.
  • The US is now participating in a cross-border wholesale CBDC project, Project Agorá, with 6 other major central banks.

Since then, Anti-Money Laundering (AML) bitcoin has proven itself to have staying power, while hundreds of “promising” crypto projects rose and fell. DeFi, NFTs, and decentralized autonomous organizations (DAOs) are among the use cases for altcoins that looked compelling but eventually fizzled out. That said, it’s impossible to say for sure that there will be never be any lasting use cases for altcoins, because nobody knows what the future holds. For example, we will see if the latest buzz around Real World Assets (RWA) and other projects convert to lasting value.

The Bank of England’s statutory monetary policy objectives: a historical and legal account

The legislation supported in the aforementioned report would already include a clause providing the authority to take action to prevent market concentration. And lowering entry costs by reducing the regulatory burden of banks created solely to issue stablecoins would likely go in the direction of increasing competition among issuers. I refer what are stablecoin payments to stablecoins backed by reserves as synthetic CBDC because the term synthetic (in finance) refers to a combination of assets that pays the exact return of another asset.

UK digital pound faces technical and operational challenges

Accounting for intangible digital assets under generally accepted accounting principles is certainly not trivial. Potential challenges include recognition and initial measurement, as well as valuation of digital assets and possible impairment charges (which could apply to stablecoins if their peg is not absolute). If a financial institution holds digital assets in a third-party-hosted wallet service (a crypto custodian), it remains to be seen whether it should recognize the assets on its own financial statements or those of the custodian. The perception of a lack of regulatory clarity concerning digital assets, especially in Europe and North America, could pose thorny issues for treasury management. Still, the regulatory playing field is evolving, suggesting the picture may soon become clearer. New rules in the pipeline include the Lummis-Gillibrand Responsible Financial Innovation Act in the United States, the Markets in Crypto-Assets regulation in Europe, and new restrictions on stablecoins in Singapore.

Stablecoins vs. Central Bank Digital Currencies

Retail CBDCs are accessible to the general public for everyday transactions, while wholesale CBDCs are used for interbank settlements. In a two-tier system, commercial banks distribute CBDCs to the public, while in a single-tier system, the central bank holds all Central Bank Digital Currency accounts directly. Central Bank Digital Currency is the digital form of a country’s fiat currency, which is regulated by its central bank. CBDCs usually have the backing of the government and central banks and are, therefore, more stable and less volatile than crypto. They are also more regulated and, thus, more protected against fraud and manipulation. On the downside, CBDCs are less anonymous than crypto and may be subject to more government control.

We will also keep a close watch on trends in the payments landscape and private sector innovation, including cash usage, advancements in UK payments systems and relevant international developments. Other cryptocurrencies may fluctuate in value relative to, say, the U.S. dollar. In contrast, the price of a stablecoin should not change relative to the currency to which it’s pegged. A stablecoin worth $1 aims to maintain the price of $1; nothing more, nothing less. Different blockchains offer distinct features, allowing stablecoins to be issued in ways that best meet the needs of issuers and users.

They process over $200 billion in transactions worldwide, transforming payment and asset transfer methods. According to CoinMarketCap, approximately 200 stablecoins are currently registered, but the definition and technical structure of stablecoins remain complex. This article examines the types and evolution of stablecoins, comparing them to the history of the US banking system through an analysis presented by a16z partner Sam Bronner. While regulatory clarity is emerging, firms will continue to navigate uncertain commercial models for many new forms of money and payments when making strategic infrastructure investment decisions in 2025. Nevertheless, in the long-term, interaction with DLT-based forms of money appears inevitable.

However, authorities could prevent data collection with regulation as well, and the issuance of CBDC could also require the regulation of wallet providers to prevent data collection. Since Russia’s invasion of Ukraine and the G7 sanctions response, cross-border wholesale CBDC projects have more than doubled. There are currently 13 of them—including Project mBridge—which connects banks in China, Thailand, the UAE, Hong Kong, and Saudi Arabia.

Polkadot enables interoperability between different blockchains through its “parachain” system. Its shared security model allows multiple specialized blockchains to operate simultaneously. Shiba Inu emerged as a tongue-and-cheek “DOGE killer,” yet achieved significant market cap when speculators were able to turn it into a viral growth sensation. Avalanche provides a scalable blockchain platform using a unique consensus mechanism. It enables multiple custom deployments and has gained traction in some DeFi applications.

Stablecoins vs. Central Bank Digital Currencies

Unregulated stablecoins would not be easily trusted, hence limiting their use as means of payment. In the first section, I discuss the potential regulatory framework for stablecoins. In the second section, I describe how CBDCs could become inessential in the presence of such a regulatory framework. In this article we discuss the ways treasurers may resolve outstanding questions, viewed through the lenses of institutional risk appetite, regulation, and technology infrastructure (exhibit). We examine potential impacts on products, technology, risks, and accounting, and offer some thoughts on potential solutions, especially in the context of European and North American regulatory jurisdictions.

The platform offers fast transaction speeds and low costs, though it faces ongoing regulatory challenges. Altcoins exist to explore the potential of blockchain technology and address limitations in existing cryptocurrencies. The Solana ecosystem has become a particularly active hub for new token creation, thanks to its low transaction costs and high processing speed. The platform’s accessibility has led to an explosion of new tokens that are based on its blockchain, with developers able to launch new projects with minimal technical barriers.

In particular, there will be implications for income, expense, andtax reporting. Holding digital assets will require access to secure custody solutions, either in-house or contracted through a specialty third-party provider that can build robust cybersecurity defenses. Privacy concerns may arise in CBDCs, especially with strong central bank control, while in stablecoin regulation, the level of privacy depends on specific regulations. Fiat money in blockchain refers to traditional government-issued currency (like USD or EUR) used as a medium of exchange on blockchain platforms or…

A stablecoin is a digital asset pegged to the value of a real asset or another cryptocurrency. Since Bitcoin’s inception back in 2009, cryptocurrencies have come quite far, with there being over 320 million crypto users worldwide as of 2022. While Bitcoin is yet to be officially accepted and regulated by any of the major countries in the world, they are seen as a threat to fiat finance by most central banks. To combat the deposition of traditional currencies, many countries, however, have come up with the concept of CBDCs or central bank digital currencies. CBDCs are supposed to be cryptocurrencies controlled by the central banks of various countries. Countries like the UK and India already have plans to test out central bank digital currencies like the Digital Euro and the Digital Rupee respectively.

A CBDC is essentially the official fiat currency of a country being represented in a digital format. Cryptocurrency has been touted for its potential to usher in a new era of financial inclusion and simplified financial services infrastructure globally. To date, however, its high profile has derived more from its status as a potential store of value than as a means of financial exchange. That disconnect is now evolving rapidly with both monetary authorities and private institutions issuing stabilized cryptocurrencies as viable, mainstream payments vehicles.

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