In recent years, digital currencies have become a hot topic, with terms like USDT (Tether) and central bank digital currencies (CBDCs) frequently discussed. Although both types of currencies share some digital features, they are fundamentally different in structure, purpose, and stability. As digital currencies become increasingly prevalent, distinguishing between various types is crucial. This post clarifies these distinctions and considers the wider implications of their success—or failure.
USDT: A Private Stablecoin
USDT, also known as Tether, is a stablecoin designed to maintain a stable value by pegging itself to the US dollar. Issued by Tether Limited, a private company, USDT aims to preserve a 1:1 value ratio with the USD. This stability is dependent on Tether’s ability to manage its reserves effectively. The stability of USDT is closely tied to the financial health and operational integrity of Tether Limited. If the company encounters significant legal or financial issues, the value of USDT could collapse, leading to disruptions in markets that rely on its stability.
CBDCs: Government-Backed Stability
In contrast, CBDCs are fundamentally different. Unlike USDT, CBDCs represent a digital form of a country’s official currency and are backed by national governments. This government backing provides a robust safety net, ensuring the stability of CBDCs. They are directly tied to the national fiat currency, with their stability supported by the entire financial and regulatory infrastructure of a country. The failure of a central bank is far less likely to affect the value of a CBDC compared to the potential collapse of a private stablecoin.
As of May 2024, a total of three countries have launched their own CBDC: the Bahamas, Jamaica, and Nigeria[1]. Meanwhile, around 20 countries have launched pilot programs, and many more are in the preliminary phases of either developing or researching their own CBDCs.
In Hong Kong, the Monetary Authority has been researching a retail CBDC since 2021[2]. During “Project e-HKD,” the government explored what a retail CBDC in Hong Kong might look like from both a technical and policy perspective. Hong Kong has also launched an “e-HKD Pilot Programme,” with Phase 2 expected to last until mid-2025. While no final decision has been made on whether or when an e-HKD will be introduced, the discussion remains active among stakeholders.
To Consider…
While CBDCs promise stability and government backing, they raise several interesting questions:
- How will the introduction of CBDCs reshape the relationship between citizens, governments, and private financial institutions?
- Could CBDCs inadvertently enhance the dominance of major currencies, such as the US dollar, and suppress the development of smaller economies?
- What impact might CBDCs have on financial inclusion? Will they provide more people access to digital finance, or could they widen the gap between those who have access to technology and those who do not?
- How will central banks manage the balance between innovation and regulation?
[1] https://www.atlanticcouncil.org/cbdctracker/
[2] https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/fintech/central-bank-digital-currency/
Leave a Reply