By Nick Anthony, Translated by Shaw Jinse Finance. In recent years, growing concerns have emerged that stablecoins are central bank digital currencies (CBDCs) in disguise. This concern has intensified significantly since US President Trump and Congress became more supportive of stablecoins. While there is indeed overlap between the two types of currency technologies, it is important to distinguish between them. Only central bank digital currencies, by default, give the government direct access to and control over your financial activities. Therefore, stablecoins, like mobile banking apps or debit cards, are not central bank digital currencies. For these electronic payment mechanisms to qualify as central bank digital currencies, the government must take over their production from private enterprises and strictly control all aspects of their use. The threat of this government takeover is always present, but it is not unique to stablecoins. Are stablecoins and CBDCs the same thing? Let's consider some basic definitions. A stablecoin is a privately created cryptocurrency whose value is pegged to another currency, commodity, or other equivalent. Companies issuing stablecoins typically profit from interest earned on their reserves. Now that the US Congress has established a legal framework for stablecoins, we expect more traditional financial institutions to enter the market, seeing opportunities to create new service lines and reduce transaction costs for existing services. A central bank digital currency (CBDC) is a digital form of national currency directly under the responsibility of the central bank. In other words, a CBDC is a digital currency managed and maintained by the government. Governments are actively pursuing CBDCs primarily in response to the rise of cryptocurrencies such as stablecoins. Currently, over 139 different jurisdictions are developing central bank digital currencies. A CBDC is the epitome of a centralized government currency. In almost every respect, it stands in stark contrast to Bitcoin, a decentralized, permissionless currency not controlled by a state. Stablecoins, however, fall somewhere in between. Although they are created by the private sector and, in most cases, are accessible to anyone with an internet connection, they still rely on centralized issuers and may be subject to censorship or programmatic control. Of course, not all cases fit neatly into these categories. For example, if banks begin issuing stablecoins, they are more likely to use closed, permissioned systems—similar to their existing services, requiring identity verification. Furthermore, even issuers currently at the forefront of this technology face regulatory compliance pressures. Tether (issuer of USDT) and Circle (issuer of USDC) have both repeatedly frozen stolen funds. However, the risks of CBDCs are clear. Only with a CBDC will your financial information be held by the government by default. In this scenario, stablecoins pose the same risks to civil liberties as debit cards. To access information, the government must first request it from the bank or stablecoin issuer, rather than directly controlling it. This "air barrier" separating individuals from the state is far from ideal. In fact, when I'm not discussing the risks of CBDCs, I often write that financial privacy in the United States has been an illusion for decades. However, it's important to maintain this distinction in this discussion, as the situation could be much worse. Recall that in 2022, former Canadian Prime Minister Justin Trudeau chose to invoke a controversial law to freeze the bank accounts of protesters. This controversial law, known as the Emergencies Act, marked the first time it had been invoked since its inception in 1988. Trudeau had to wait weeks until social unrest reached a critical mass before deeming its use justified. Even so, the move remains controversial. If Canada had already had a CBDC, there would be no waiting period—the entire process of freezing accounts could have been done internally. Similarly, consider the 27.5 million transaction reports that banks submitted to the government last year. If the US had a CBDC, the government wouldn't have to archive millions of transaction records, but trillions, and these records would be automatically preserved. Neither system is good, but the latter is far worse. Are stablecoins worse than CBDCs? There's an interesting argument that stablecoins could be worse than CBDCs for financial regulation. Simply put, this argument goes, CBDCs are bad because they mean the government has all your financial data, while stablecoins are worse because they mean the government and the rest of the world have that data. This concern stems from the fact that stablecoins are traded on a public blockchain that anyone can view. However, records maintained on public blockchains are different from records maintained in government databases. Transactions on blockchains are anonymous. While it's true that some investigative techniques exist to uncover someone's identity on a blockchain, the KYC information collected by third parties isn't itself recorded on the blockchain. With a CBDC, by contrast, the government has your identity on file, explicitly linked to your transactions. Not only does the government see every transaction, but it also knows the identities of both parties involved. Furthermore, despite governments' best efforts to stifle innovation, new tools are being developed every day to restore financial privacy. Innovations around self-hosted wallets, privacy layers, and zero-knowledge proofs offer practical ways to mitigate the risk of surveillance, options that simply don't exist with government-run central bank digital currencies. Warning: Government-Created Stablecoins Are CBDCs Before concluding, there's actually one scenario where a stablecoin is indistinguishable from a CBDC: when it's created and controlled by a government. Unfortunately, some government agencies have been considering creating their own "stablecoins." For example, Palau partnered with Ripple on a quasi-CBDC pilot project. In 2023, Ripple announced that Palau would launch a three-month pilot to test a government-provided, dollar-backed stablecoin. Ripple even mentioned in its press release that the pilot would "leverage the Ripple Central Bank Digital Currency Platform." The reason for using the term "stablecoin" is unclear. Perhaps because Palau lacks a central bank, the term "central bank digital currency" might seem unconventional. However, in essence, this government-provided stablecoin is indeed a central bank digital currency. Palau is not an isolated case. The US state of Wyoming is currently considering how to issue a government-provided stablecoin. The Wyoming Stablecoin Committee reportedly rejected the idea of a CBDC because the product would be backed by US Treasury bonds, whereas a CBDC would have no backing. However, the specific product "backing" the currency is irrelevant. For all purposes, such government-provided stablecoins should be considered CBDCs.
Conclusion
Defining a strict definition for an emerging technology is never easy, especially given its rapid development. There will always be edge cases and gray areas. However, there is a clear distinction between central bank digital currencies (CBDCs) and stablecoins. While neither possesses the attributes of truly open and free monetary technology, the distinction remains important because only CBDCs, by default, grant the government direct access to and control over financial activities.
As Congress works to prevent the emergence of CBDCs in the United States, the next step should be to correct past mistakes. This means reforming the Bank Secrecy Act to restore the financial privacy that Americans should have always enjoyed. Doing so would ultimately help further widen the gap between CBDCs and stablecoins.
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