Central bank digital currencies (CBDCs) can work well with decentralized finance (DeFi), and have a lot of potential to drive DeFi adoption, according to a Swiss central bank official.
Among the various types of digital currencies, it is the CBDC that could bring more stability and lower risks to the development of DeFi, according to Thomas Moser, member of the administrative council of the Swiss National Bank (SNB).
To grow, DeFi needs stable money, which is why stablecoins were invented, and these clearly helped DeFi become more popular, Moser told Cointelegraph.
Despite being polar opposites, centralization and decentralization in digital currencies can work together, given that centralization is not bad for DeFi, Moser argued. He noted that major stablecoins such as Tether (USDT) and USD Coin (USDC) are the most used in DeFi, both of which are centralized.
“So ‘something centralized’ has already helped DeFi quite a bit,” the SNB official stated.
Unlike Tether or USD Coin, a CBDC would pose less risk to DeFi than a tradable stablecoin because central bank money “It carries no counterparty risk,” Moser said. “A central bank cannot fail, because it issues irredeemable money”, he added.
Other types of digital currencies, including cryptocurrencies such as Bitcoin (BTC) or Ether (ETH), are also irredeemable, meaning there is no counterparty risk. However, its price is not stable enough to support the sustainable growth of DeFi, the official noted.
“Algorithmic stablecoins would also not involve counterparty risk, but we have not seen successful algorithmic stablecoins so far,” Moser said, referring to the collapse of TerraUSD (UST) in May this year. “A CBDC could provide more stability and lower risks than stablecoins,” added the official.
Moser’s remarks came shortly after the SNB and blockchain firm Cypherium published a joint paper on blockchain technology and CBDCs on September 26. The study concluded that CBDCs could be a useful tool to stabilize the crypto economy, including the DeFi sector.
The document specifically mentioned recent statements by the Governor of the Bank of France, François Villeroy de Galhau, who stated that CBDCs “are not the big brother of central banks that threaten the free world of decentralized finance.” He underscored that CBDCs will be more about “providing more tools to help make DeFi successful and sustainable.”
Cypherum CEO Sky Guo expressed confidence that the combination of DeFi and CBDC technology is “destined to happen”, stating:
“DeFi is fully automated and can free CBDC from human limits. With CBDC used in DeFi, we can expect hundreds and trillions of dollars of liquidity to be poured into this market, large institutions to enter this space, and assets of the real world move on-chain”.
The SNB study is not the first time that a central bank has thought about potential interactions between CBDCs and DeFi. In April 2022, central bank officials discussed potential interactivity between DeFi-based markets and CBDCs at a conference co-organized by the Bank for International Settlements Innovation Center and the SNB.
As we told you earlier, the general public has largely opposed the idea of CBDCs due to the associated lack of privacy, with many referring to such projects as “slavecoins”. It remains to be seen whether central banks are actually willing to contribute to DeFi adoption, given that the world has yet to see much central bank support for cryptocurrencies.
The news comes at a time when major European banks continue to trial cross-border retail payments and remittances with CBDC. On September 28, the central banks of Sweden, Norway, and Israel announced another project to test international CBDC payments.
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