Look beyond the surface similarities though, and a world of differences emerges.
A central bank digital currency is issued directly by your country’s central bank. This means it represents the equivalent of your domestic currency but in digital form.
Most countries rely on the commercial banking system to deliver money – a central bank digital currency skips those steps. That might seem convenient, but it also implies much more power in the hands of states and the potential for abuse. A central bank has the direct ability to set interest rates and to create money, unlike commercial banks. A world of individualized interest rates is not too far from a world where every transaction is monitored, scored for political compliance, and accounts are handled accordingly.
Meanwhile, a stablecoin is somewhat in the middle. A private company issues a stablecoin – it cannot make money or enforce central bank levels of power. Yet stablecoin issuers are still companies, and they can freeze your funds if ordered by a government.
Then, enter Bitcoin and cryptocurrencies. There’s this idea that Bitcoin is private and can’t be censored. That isn’t perfectly true. But it does offer the possibility of sending money around the world without any bank or intermediary.
That doesn’t mean that if you hold Bitcoin in an exchange or an ETF, the Bitcoin can’t be taken from you (if, for example, the company that you’re custodying Bitcoin with goes bankrupt). When you’re holding Bitcoin on an exchange, you’re really holding a sort of banked asset, a paper claim to an underlying asset that shouldn’t be confused with actual ownership. It’s possible the majority of people hold Bitcoin in such a wrapper and not actual self-custodied Bitcoin.
However, if you do hold Bitcoin in a self-custodied fashion, you are no longer dependent on banks and the network of trust (and possible censorship) that runs financial systems today. And you can make choices, including how you transact, that can express different preferences for hiding some information from the public (privacy).
Different return profiles and risk
At the most basic level, a central bank digital currency basically has the same value as the underlying currency of your country. In some countries, there may be a small interest rate paid on it, making it functionally equivalent to a bank account with spending all wrapped in one. But essentially, your “return” on a central bank digital currency will likely be close to zero, as it will largely be interchangeable with existing currency equivalents or chequing account balances.
Stablecoins are mostly US-dollar backed, meaning that you can exchange the stablecoin in question for US dollars or the asset they’re backed with from the issuer in question, whether that’s Circle or the Tether team or another issuer. The two most common right now are USDC and USDT (Tether).
In theory, stablecoins protect you against inflation and provides a route to US dollar demand, even as domestic currencies weaken while the US dollar still holds value. For countries like China, with capital controls, and Iran, with banking controls and rampant inflation, it can be very tempting for their citizens to hold US dollars physically outside the financial system forced upon them. There’s also the possibility that exchanges and services will offer you yield of some kind, essentially allowing you access to banking-like returns on this money.
Stablecoins now offer an asset that moves in lockstep with the US dollar, without the need to acquire or store it physically, with access to markets that never close. This can be the same return profile if you’re used to a system that lets you save in USD. But if you’re in a currency that is rapidly depreciating against the USD – which is most currencies in the world – then having the ability to transact and save in USD might be a godsend. It won’t get you a return in a conventional sense, but it will prevent you from the consequences of inflation.
Bitcoin is the most obvious difference in terms of return. It is correlated with different assets, but also set against the US dollar. Over the longer term, over the last dozen years or so, it has shown an incredible return profile, rising from a few US dollars per Bitcoin to more than a hundred thousand dollars per Bitcoin at times.
Even in recent years, Bitcoin’s return, measured against the United States dollar, remains strong – in 2023 and 2024, it was the financial asset with the highest return. The limited supply of Bitcoin creates a dynamic in which a scarcer asset is priced relative to a more common one that becomes increasingly common as barriers to its growth loosen. Bitcoin’s return has some correlation with the long-term monetary supply growth of the US dollar and other major currencies -as the latter grows inevitably, Bitcoin’s value denominated against the US dollar and a basket of other major currencies also grows. Conversely, you take the most risk with Bitcoin, as it can descend quite rapidly in value against these currencies.
Different futures
Most importantly, these different types of digital monies actually imply quite different futures.
Central bank digital currencies aim to help government capacity grow, as an extension of the current world. It makes capabilities that were once considered off-limits for the government (the ability to record an individual’s transactions and regulate them to that level) a matter of should or should not – not could or could not.
Stablecoins offer a world where governments around the world retain some control. They can go after and freeze funds, but for all intents and purposes, issuers remain private companies. In some respects, it replicates the standard of having a company with a very human CEO to go after if there’s something governments want.
Bitcoin, among other cryptocurrencies, is unique. Unlike other cryptocurrency CEOs, Satoshi has disappeared. There’s no one individual to appeal to if you want Bitcoin to do something for you. Rather, it’s a diverse community with many different interests balanced against one another, some economic and some moral, always leaning in the direction of giving individuals more liberty to do what they can with their money.
Perhaps it is in Bitcoin that the old dream of having a minimal state, one constrained more by the law of physics, rather than the arbitrary impositions of man, can see some of its greatest light – though Bitcoin need not overturn nation-states to allow some more people even within a national framework to carve out their own liberties.
The battle between which monetary future will win is complex – there isn’t perhaps going to be an absolute winning configuration. For some time, a mix of cryptocurrencies, stablecoins and central bank digital currencies will serve in their different ways. Yet, looking deep inside the hood, it’s essential to realize the differences among these technologies – and the different futures they imply.
