Governments have finally stood up from the sidelines and are actively embracing the innovation brought about by cryptocurrencies. While their approach is not novel, it is a more secure and efficient way of conducting activity in the same way it is done today. In a relatively in-depth blog post, the IMF explores the advantages behind a privately issued stablecoin that is backed by central bank reserves, September 26, 2019.
Synthetic CBDCs: Cheaper and Safer
Central Banks have begun their journey into exploring cryptocurrency and distributed ledgers with the end goal of launching a fiat backed digital currency to improve ease of transacting.
This route has several problems, the biggest of which is that the government does not have the will or expertise to design platforms with intuitive UIs and efficient engines.
It is unlikely central banks would ever jump on board, but an offering like USDC – or even Libra – if backed by the reserves of the central bank could be a more efficient way to actually use stablecoins for anything more than hedging crypto volatility.
This mechanism would allow the private sector to do what it does best: focus on innovation. But it requires pure centralization, as the reserves used to back the coin can be seen as the public’s trust in authorities. Simply put, this model integrates private sector integration with trust in central authorities.
In today’s market, there are far more centrally backed and run stablecoins than decentralized alternatives.
USDC, Tether, TrueUSD, PAX, and most other widely used stablecoins are backed by dollars in a private bank account – or not even that.
DAI is currently the only truly decentralized stablecoin with a healthy degree of adoption. More alternatives in this realm are essential in order for the space to thrive, and the lack of options has rendered payments via stablecoins incredibly stagnant.
But maybe the IMF has a point. Maybe for something to have a truly stable value requires us to have trust in authority. After all, stability is a function of sentiment and trust in the core protocol – something humankind has done with unbacked paper money for almost a century now.