A growing concern has emerged in recent years that stablecoins are secretly central bank digital currencies (CBDCs) in disguise. This concern has grown significantly since President Donald Trump and Congress have become more supportive of stablecoins. There is certainly overlap between the two monetary technologies, but it’s important to keep the categories distinct.
Only CBDCs involve governments having direct access and control over your financial activity by default. For that reason, stablecoins are no more CBDCs than mobile banking apps or debit cards. For any of these electronic payment mechanisms to be a CBDC, the government would have to take over their production from private companies and strictly control every aspect of their use. The threat of such a government takeover is always in the background, but that threat is not unique to stablecoins.
Are Stablecoins the Same as CBDCs?
Starting from the ground level, let’s consider some definitions. A stablecoin is a type of cryptocurrency created by the private sector that has its value pegged to the value of another currency, commodity, or something else of value. The companies behind them often make money on the interest earned on their reserves. Now that Congress has established a legal framework for stablecoins in the United States, more traditional financial institutions will likely also enter the market, recognizing the opportunities to create a new line of services and also reduce transaction costs in existing services.
A CBDC is a digital, national currency that is a direct liability of the central bank. In other words, a CBDC is digital money that is managed and maintained by the government. Governments have largely been pursuing CBDCs in response to the rise of cryptocurrencies like stablecoins. As it stands, over 139 different jurisdictions are pushing forward with CBDC development. China, Nigeria, and others have already launched CBDCs domestically.
A CBDC is the epitome of centralized, government money. In almost every respect, it stands in direct contrast to Bitcoin, which operates as a decentralized, permissionless money outside state control. Stablecoins, however, fall somewhere in the middle (Table 1). While they are created by the private sector and mostly accessible to anyone with an internet connection, they remain reliant on centralized issuers and can be censored or programmed.
Now, not everything fits into these categories neatly. For instance, if banks begin to issue stablecoins, they are more likely to use closed and permissioned systems—mirroring their existing services and thus requiring ID verification. Furthermore, even the existing issuers at the forefront of this technology are subject to compliance pressures. Both Tether (the issuer of USDT) and Circle (the issuer of USDC) have frozen stolen funds on multiple occasions.
Yet, the risks of CBDCs are distinct.
It is only with a CBDC that your financial information would be held with the government by default. In contrast, a stablecoin in this scenario carries the same risks to civil liberties as a debit card. Rather than having direct control, overzealous governments must first go to the bank or stablecoin issuer to request information.
This air gap separating individuals from the state is by no means ideal. In fact, when I’m not writing about the risks of CBDCs, I’m often writing about how financial privacy in the United States has been an illusion for decades. However, it’s important to maintain distinctions in this conversation because things could become much worse.
Consider when Canadian Prime Minister Justin Trudeau chose to invoke a controversial law to freeze the bank accounts of protestors back in 2022. That controversial law is called the Emergencies Act, and this instance was the first time it had been invoked since the law was created in 1988. Trudeau had to wait weeks before there was enough unrest to justify invoking the law. Even then, it was considered controversial. If Canada had had a CBDC at the time, there would have been no wait—the process of freezing accounts would have all been done internally.
Similarly, consider the 27.5 million reports on transactions that banks were required to file with the government last year. If the United States had a CBDC, then there wouldn’t be millions of transactions on file with the government; there would be hundreds of billions, and they would be there by default. Both systems are bad, but the latter is much worse.
Are Stablecoins Worse Than CBDCs?
There is an interesting argument that stablecoins might be worse than CBDCs with respect to financial surveillance. In short, the argument is that a CBDC is bad because it involves the government having the entirety of your financial data, but a stablecoin is worse because it involves the government and the rest of the world having that data.
This concern stems from the fact that stablecoins are exchanged on public blockchains that anyone can inspect. Yet, the records kept on public blockchains are different from what would be kept on government databases. Transactions on blockchains are pseudonymous. Yes, there are investigatory techniques that can be used to uncover someone’s identity on the blockchain, but the know-your-customer (KYC) information collected by third parties is not recorded on the blockchain itself.
In contrast, with a CBDC, the government would have your identity on file and clearly tied to your transactions. The government could see not only every transaction but also exactly who was part of each side of the exchange.
Moreover, despite the government’s best efforts to stomp out innovation, new tools for reclaiming financial privacy are being developed every day. Innovations surrounding self-hosted wallets, privacy layers, and zero-knowledge proofs offer meaningful ways to reduce surveillance risk—options that simply wouldn’t be available with a government-run CBDC.
Caveat: Government-Created Stablecoins Are CBDCs
Before concluding, there actually is one instance where a stablecoin is no different than a CBDC: when it is created and controlled by a government. Unfortunately, some government entities have been flirting with the idea of creating their own “stablecoins.”
For example, the country of Palau had a quasi-CBDC pilot with the company Ripple. In 2023, Ripple announced that Palau would be launching a three-month pilot to test a government-provided stablecoin backed by the US dollar. Ripple even noted in the press release that the pilot would “leverage the Ripple CBDC Platform.” Why the term “stablecoin” was used is unclear. Perhaps it’s because Palau has no central bank, and that might make the name central bank digital currency awkward. However, for all intents and purposes, this government-provided stablecoin is indeed a CBDC.
Palau isn’t alone either. The state of Wyoming is currently weighing how it might issue its own government-provided stablecoin. The Wyoming Stable Token Commission reportedly rejected the idea that it is creating a CBDC because the product is backed by US Treasuries, while a CBDC is backed by nothing. But which item is “backing” the currency makes no difference. For all intents and purposes, this government-provided stablecoin would be a CBDC.
Conclusion
Carving out a strict definition for a new technology is never an easy matter, especially when it is rapidly evolving. There will always be edge cases and grey areas. However, there is a distinct difference between CBDCs and stablecoins. It is correct that neither embodies truly open and free monetary technology, but the distinction is still important because only CBDCs give the government direct access and control over your financial activity by default.
As Congress works to prevent a CBDC from taking shape in the United States, the next step should be fixing the mistakes of the past. That means reforming the Bank Secrecy Act so Americans can reclaim the financial privacy they should have had all along. Doing so will ultimately help further widen the gap between CBDCs and stablecoins.