Stablecoins vs. CBDCs: What's What in the Digital Money World

a pocketful of coin

Keywords:

Digital money, Central Bank Digital Currency (CBDC), Stablecoins, Fiat-backed stablecoins, Crypto-collateralized stablecoins, Algorithmic stablecoins, Commodity-backed stablecoins, Yield-bearing stablecoins, Hybrid stablecoins, E-money, Digital Euro, Digital Lira (Turkey), Digital Yuan (China), Blockchain payments, MiCA, GENIUS Act (US), Travel Rule compliance, FATF monitoring, British Virgin Islands (BVI) VASP Act, Cayman Islands VASP Act, Decentralized governance, DAO structures.

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A Brief Look at Digital Money

The concept of money has evolved constantly from shells and metals to paper, and eventually to the electronic bank money most people use today. Digital money represents the next step in this evolution. Unlike physical cash or balances held at commercial banks, digital money exists entirely in electronic form, issued, transferred, and recorded on digital platforms.

Digital money can be broadly divided into three categories:

• Private digital money: created and managed by private entities, such as stablecoins or e-money. 

• Central bank digital money (CBDCs): issued and guaranteed directly by a country’s central bank.

• Cryptocurrencies: decentralized assets like Bitcoin or Ethereum, which are not pegged to fiat currencies.

The shift toward digital money stems from demands for faster, cheaper, and more inclusive financial systems. As global commerce moves online, and as cross-border payments become essential, digital money aims to solve inefficiencies of legacy systems while providing new forms of programmability and accessibility.

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Central Bank Digital Currencies (CBDCs)

CBDCs are the state’s answer to digital money. Instead of relying on privately issued tokens like stablecoins, they are issued and guaranteed directly by central banks and carry the status of legal tender. In other words, they are the digital version of cash — but existing only on a screen.

There are generally two approaches to CBDCs:

• Retail CBDCs: Designed for everyday use by individuals and businesses, often accessible through mobile wallets or banking apps. Think of them as digital banknotes in your pocket.

• Wholesale CBDCs: Targeted at banks and financial institutions for interbank payments and settlements, aiming to modernize the plumbing of the financial system rather than everyday transactions.

Note: Bank Deposits ≠ CBDCs

While bank deposits you see on your mobile app may already feel like “digital money,” they are actually claims against commercial banks (deposits), not central bank money. CBDCs, by contrast, are direct liabilities of the central bank, carrying the same legal tender status as cash. This means CBDCs eliminate intermediary risk, can be programmable, and may be accessible without needing a bank account.

Why governments are interested

The appeal is straightforward:

• Trust and stability – Unlike private stablecoins, CBDCs are backed directly by the central bank, which removes credit or liquidity risk.

• Financial inclusion – They can bring digital payment access to people with nothing more than a smartphone, especially in regions with weak banking infrastructure.

• Efficiency – They promise faster, cheaper transfers, particularly across borders where legacy systems are slow and costly.

• Programmability – CBDCs can be designed to allow automatic payments or conditional transfers, much like smart contracts.

The sticking points

Of course, CBDCs come with their own baggage:

• Privacy – If every transaction goes through the central bank, how much surveillance is too much?

• Impact on banks – If people prefer to hold CBDCs over bank deposits, that could drain liquidity from commercial banks and reshape traditional banking models.

• Adoption and technology – Rolling out a CBDC requires significant infrastructure upgrades and cooperation across borders, which is easier said than done.

Where things stand globally

Governments around the world are actively exploring CBDCs. Today, nearly 140 countries and currency unions, representing close to 98% of global GDP, are studying, piloting, or already rolling them out. Mostly under developed economies like The Bahamas (Sand Dollar), Nigeria (e-Naira), Jamaica (Jam-Dex), and Zimbabwe (ZiG) have gone live. Others, such as China with its digital yuan and India with its e-rupee, are running large-scale pilots.

Closer to home, the European Central Bank is working toward a digital euro, while Türkiye has announced trials for a digital lira. In the United States, the Federal Reserve is still studying design options but hasn’t committed to issuing one.

The trend is clear: governments see that the future of money is digital. The real question is whether people will trust and adopt state-backed versions — or whether private models like stablecoins will remain the preferred choice for global users.

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What Are Stable Coins?

Stable coins are virtual assets issued by private entities which are stable against a fiat currency or another asset (e.g., gold, oil, other commodities.). The tokenomics and the algorithms of stable coins work in order to keep the coin’s value stable.

To better understand their unique position, it is useful to distinguish them from e-money: unlike e-money, which is strictly regulated and fully backed by fiat currency under legal frameworks, stablecoins may rely on different mechanisms such as fiat reserves, crypto collateral, or algorithms.

Based on these mechanisms, stablecoins are generally classified into several main categories, each with distinct models, advantages, and risks:

1. Fiat-Backed Stablecoins (Most Common)

   • Mechanism: 1:1 backed by fiat currency (e.g., USD, EUR) held in bank accounts or custodians. 

   • Examples: USDC, USDT, Pax Dollar (USDP). 

   • How they’re created: Deposit $1 → mint 1 stablecoin. Redemption works the opposite way. 

   • Pros: Simple, stable, easy to understand. 

   • Cons: Centralized, regulatory dependent.

     
     

2. Crypto-Collateralized Stablecoins

   
   

   • Mechanism: Users lock volatile crypto (ETH, BTC, etc.) into a smart contract as collateral, and mint stablecoins against it. Usually over-collateralized (e.g., $150 ETH → mint $100 DAI). 

   • Examples: DAI (MakerDAO), sUSD (Synthetix). 

   • Pros: Decentralized, transparent. 

   • Cons: Collateral volatility, liquidation risk. 

     
     

3. Algorithmic (Uncollateralized or Partially Collateralized)

   
   

   • Mechanism: Peg is maintained by algorithms adjusting supply and demand. Some are partially backed. 

   • Examples: Frax (FRAX) (fractional), Ampleforth (AMPL) (elastic supply). 

   • Pros: Capital efficient, fully on-chain. 

   • Cons: Risky — failures like TerraUSD (UST) show fragility.

4. Commodity-Backed Stablecoins

   • Mechanism: Pegged to real-world assets like gold, oil, or precious metals. 

   • Examples: PAX Gold (PAXG), Tether Gold (XAUT). 

   • Pros: Ties crypto to tangible assets, diversifies beyond fiat. 

   • Cons: Custody and audit challenges. 

5. Yield-Bearing Stablecoins

   • Mechanism: Backed by yield-generating assets (like U.S. Treasuries, lending protocols, or DeFi yield). Instead of holding $1 idle in a bank, reserves are invested to earn returns. 

   • Pros: Generates passive yield, popular for institutions and DeFi. 

   • Cons: Regulatory scrutiny (looks like a security/deposit product).

     
     

6. Hybrid Models

   • Some projects mix these approaches

   • Frax – part collateralized, part algorithmic

   • Reserve (RSV/RTokens) – basket of fiat-backed and crypto-backed assets

Why stable coins—can’t we just keep the reserve?

This is the natural question when discussing stablecoins—whether as a currency or an investment instrument. However, when considering the investment tools most commonly used by the general public today, each has limitations in terms of security, speed, returns, or overall efficiency.

Stablecoins are far from perfect and need to be well understood by both governments and the private sector. Yet, they are already enhancing existing financial tools and assets through their algorithms and fast-paced nature. Some traditional currencies are struggling due to global events and conflicts, while others remain stable. Highly stable fiat currencies, however, often offer limited investment opportunities and very low returns. Stablecoins can help struggling currencies by addressing challenges such as money laundering or underdeveloped banking infrastructure, while also enabling established currencies like the Euro or Dollar to generate interest or revenue through mixed backing mechanisms and governance structures, offering advantages over traditional financial instruments.

• 24/7 Instant Transfers: Bank money (USD, EUR) moves slowly (wire transfers, ACH, Swift can take hours or days, especially across borders). Stablecoins settle within minutes on blockchain, globally, at low cost. 

• Programmability: Stablecoins are digital and programmable — they can interact with smart contracts. This enables things fiat can’t do, like automated payments, DeFi lending, and collateral in decentralized applications. 

• Global Accessibility: Anyone with a crypto wallet can hold/use stablecoins — no need for a bank account. This is useful in places with weak banking systems, capital controls, or unstable currencies. 

• Transparency: Reserves are (ideally) verifiable through on-chain tracking and independent attestations. Traditional banks don’t usually provide this level of visibility into reserves. 

• Liquidity for Crypto Ecosystem: Stablecoins act as the “cash leg” in crypto markets. Traders use them to move in and out of volatile crypto without touching banks each time. 

How about the regulations?

Since stablecoins are generally perceived as the most secure type of virtual assets, one might expect governments to be more lenient toward them. However, their stability and resemblance to traditional financial instruments can create a false sense of security for ordinary consumers and end users.

To protect end users and retail investors, many governments have either banned or heavily regulated stablecoins.

In the United States, the Trump administration introduced the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act), establishing a regulatory framework for stablecoin issuers based in the U.S. or serving U.S. users.

The final version of the Act generated significant interest globally. Key points include:

• Issuance: The Act defines “Permitted Payment Stablecoin Issuers,” granting them exclusive authority to issue payment stablecoins. Unauthorized issuance is subject to penalties.

• Reserves: Stablecoins must be backed by USD or other low-risk assets, such as Treasury bills.

• Audits: Permitted issuers must undergo regular audits by financial auditors, with reports published publicly.

Foreign issuers serving U.S. users must also comply with SEC oversight, effectively creating a regulatory geo-fence around the U.S. While the GENIUS Act represents a major step in the industry, it does not yet cover all assets. In contrast, the EU finalized MiCA at the end of 2024, providing a more comprehensive framework.

MiCA applies to:

• EMTs (E-Money Tokens): Stablecoins backed by a single fiat currency.

• ARTs (Asset-Referenced Tokens): Stablecoins backed by a basket of assets, including currencies, commodities, or virtual assets.

EMTs, backed by government-regulated fiat currencies, are generally approved for payments. ARTs carry more risk due to their diverse backing, prompting stricter regulatory oversight.

Turkish regulators have followed a similar path, adopting a cautious approach. The Central Bank of the Republic of Türkiye (CBRT) banned the use of crypto assets for payments in 2021, and subsequent laws have not yet lifted this ban.

Currently, there are no carve-outs for stablecoins in Turkey, likely due to infrastructure gaps (e.g., Travel Rule compliance, backing policies). Nonetheless, Turkish authorities are monitoring global regulatory developments. The demand for a digital Turkish Lira is evident, as it could create value for both the financial ecosystem and the currency itself. Rumors of a digital Lira have circulated widely, and several government officials have confirmed plans to explore this.

Looking at Eastern approaches, Singapore has been particularly proactive. The Monetary Authority of Singapore (MAS) recognized crypto assets as payment instruments while many Western countries debated whether they should be considered money or securities. Singapore’s framework distinguishes between major and minor actors:

• Major Payment Institutions: Single-currency-backed stablecoins with over $5 million in circulation must obtain a MAS permit.

• Minor Actors: Those below the threshold can operate under a DPT (Digital Payment Token) license, with lower compliance and regulatory requirements.

Despite differences, all these jurisdictions are heavily regulated relative to the crypto ethos. Early actors like Tether initially chose the British Virgin Islands (BVI) for its flexibility, later moving to more regulated jurisdictions after establishing market prominence. This has created a pattern of combined legal structures in the Cayman Islands and BVI, balancing decentralization with regulatory considerations.

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Let’s talk about Cayman Islands and British Virgin Islands

The ethos of the crypto world revolves around decentralized structures and empowering communities in decision-making regarding crypto assets. Consequently, the market sought more flexible, decentralized legal entity structures for DAOs and asset issuance.

The British Virgin Islands (BVI) authorized the Financial Services Commission (FSC) to regulate crypto assets and established regulations under the VASP Act 2022. Importantly, in relation to stablecoins, the BVI VASP Act does not treat the issuance of virtual assets—including stablecoins—as a regulated activity in itself. Instead, the VASP Act governs virtual asset services, which primarily involve activities conducted on behalf of third parties with interests in virtual assets, such as operating exchanges, providing custody, or offering brokerage and other investment services. Simply issuing tokens or stablecoins, without additional services, is not considered a regulated activity under the Act.

The Cayman Islands also enacted a VASP Act in 2020. While stricter than the BVI framework, both jurisdictions provide a variety of company structures suited to crypto businesses and offer crypto-friendly tax regimes that attract teams globally.

It is common for major projects to structure their operations with a Cayman Islands-based foundation and a BVI-based business company. The foundation manages the treasury for the BVI company, which issues the virtual assets, and the foundation’s actions create value for those assets. Decisions are largely guided by community votes through governance tokens, aiming to ensure decentralized control over the project. Governance combines off-chain community decision-making with on-chain token-holder voting, which strengthens community participation and engagement.

However, this freedom comes at a cost. The BVI is currently under increased FATF monitoring, creating challenges for projects in establishing globally accepted and secure structures. Companies from these jurisdictions often face scrutiny, making it difficult to open bank accounts or enter into agreements with other regulated entities.

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Conclusion

Digital money is no longer an abstract concept, it is here and has been with us for a long time. Whether in the form of central bank digital currencies or privately issued stablecoins, the world is moving toward faster, programmable, and borderless value transfer systems. 

CBDCs emphasize state-backed trust and legal certainty, while stablecoins bring market-driven innovation and global accessibility. Both are reshaping the financial landscape in different but complementary ways.

Stablecoins have emerged as one of the most important developments in the digital asset landscape, capturing the attention of both issuers and investors. Governments worldwide are increasingly recognizing the value of highly regulated stablecoins as payment instruments, while simultaneously introducing compliance frameworks to protect end users and the broader financial system.

Despite the promise, regulatory environments such as the MiCA framework in the EU and the GENIUS Act in the U.S. remain largely untested in practice. As a result, most projects continue to operate under legacy DAO structures, carefully balancing innovation, community governance, and legal compliance.

Jurisdictions like the Panama, BVI and Cayman Islands continue to play a critical role by offering flexible, crypto-friendly legal structures that support decentralized governance and asset issuance, although projects in these regions face increased international scrutiny and operational challenges. Meanwhile, proactive approaches in jurisdictions like Singapore demonstrate how regulation can coexist with innovation, providing a model for efficient oversight without stifling growth.

In summary, digital moneys are transforming the way value moves across borders, enabling faster payments, programmable finance, and new investment opportunities. Their future will depend on the continued development of robust regulatory frameworks, secure governance models, and global coordination. For issuers and users alike, understanding the evolving legal landscape and operational considerations is essential to harness the full potential of private digital moneys while mitigating risk.