Digital currency evolution: safeguarding banks' influence in the digital payment sphere's tomorrow
In the ever-evolving world of digital finance, two key players have emerged: stablecoins and classic cryptocurrencies. These digital assets, while sharing some similarities, possess distinct characteristics that set them apart.
Stablecoins, as the name suggests, are designed to maintain a stable value, typically pegged 1:1 to a fiat currency such as the US dollar or to another asset like gold. This stability is achieved through mechanisms including cash reserves, over-collateralization, or algorithms that adjust supply to match demand. On the other hand, classic cryptocurrencies like Bitcoin do not have such pegs and often experience high price volatility.
Stablecoins serve as a bridge between fiat money and cryptocurrencies, providing a reliable store of value and unit of account that is less susceptible to market swings. They are commonly used for fast, low-cost transactions, payments, trading, decentralized finance (DeFi) applications, and cross-border transfers. In contrast, classic cryptocurrencies primarily function as speculative assets and stores of value with an emphasis on decentralization and security, though they can also be used in transactions.
Because of their stability, stablecoins generally offer lower investment returns compared to classic cryptocurrencies, which can have massive returns due to volatility but also face higher risk. Stablecoins may yield interest rates typically between 5% and 20%, serving more as a safe haven than for profit.
Stablecoins are often backed by cash reserves or collateral (fiat, other crypto, or commodities), or managed by algorithms to maintain their peg. Classic cryptocurrencies like Bitcoin rely on decentralized mining or staking and a consensus mechanism but have no backing by physical or fiat assets.
The growing importance of stablecoins is evident in the global cross-border payments market, where an estimated volume of $150 trillion per year is ripe for disruption. Cross-border payments via classic bank networks often incur high fees and can take several days, while stablecoins promise lower costs and near real-time speed.
However, technical challenges remain in the scalability of stablecoins based on public blockchains like Ethereum at high transaction volumes. Layer-2 solutions or other new blockchain protocols promise relief, but the technology still needs to mature.
In the realm of central bank digital currencies (CBDCs), many initiatives are underway worldwide, with China, the Bahamas, and Nigeria having functioning CBDCs. The European Central Bank is actively working on a digital euro for interbank transactions, although the digital wholesale Euro is initially usable only within the Eurozone, limiting its appeal to companies operating globally.
Banks can take on an indispensable role as a trusted interface in the Stablecoin and CBDC landscape, providing solutions for storage and transfer with specialized FinTechs. Stablecoins can be integrated into business processes through smart contracts, automating payments when certain conditions are met.
Despite their advantages, stablecoins face increasing regulatory scrutiny due to their pegging to real-world assets and potential impact on financial systems. They require transparency about their reserves and collateral quality. Under President Donald Trump, the idea of a "digital dollar" was banned by an order in January 2025.
In international payments outside the Eurozone, private stablecoins may continue to be preferred due to their global usage. In 2024, the transaction volume of Stablecoins surpassed that of Mastercard. Banks can bridge the gap through collaborations with crypto brokers or FinTechs to ensure liquidity.
A central criticism of stablecoins remains the issue of trust, as the claimed fiat currency backing is not always verifiable. A wholesale digital euro could theoretically offer these advantages if it is based on efficient blockchain or DLT systems.
In summary, stablecoins and classic cryptocurrencies each offer unique benefits and drawbacks. Stablecoins prioritize value stability and liquidity within the crypto ecosystem, while classic cryptocurrencies prioritize decentralization and investment value appreciation. The future of these digital assets lies in their continued evolution and maturity, as well as the development of robust regulatory frameworks to ensure trust and transparency.
| Feature | Stablecoins | Classic Cryptocurrencies | |-------------------------|--------------------------------------|------------------------------------| | Price Stability | Pegged to fiat or assets; stable | Highly volatile | | Purpose | Medium of exchange, store of value | Store of value, investment, sometimes payments | | Backing Mechanism | Reserves, collateral, algorithms | Decentralized consensus (mining or staking) | | Investment Return | Low to moderate yields (5-20%) | Potentially high returns, high risk | | Use Case | Crypto-fiat bridge, stable transactions | Speculative trading, decentralized finance |
- In the realm of the banking-and-insurance industry, banks can take on an indispensable role as a trusted interface in the stablecoins and CBDC landscape, providing solutions for storage and transfer with specialized technology companies.
- Despite their increasing regulatory scrutiny due to their pegging to real-world assets and potential impact on financial systems, the importance of stablecoins in the finance industry is evident, as their transaction volume surpassed that of Mastercard in 2024 in international payments outside the Eurozone.
- In the industry of technology, particularly in the sector of banking-and-insurance and finance, stablecoins, due to their technological backing, are often used for fast, low-cost transactions, payments, trading, decentralized finance (DeFi) applications, and cross-border transfers, promising lower costs and near real-time speed.
