CBDC vs. stablecoins on Cardano

Published 1.3.2023

Central Bank Digital Currency (CBDC) is a digital form of fiat money issued by a central bank. We believe you have all heard of this phenomenon. Many central banks around the world are in the research phase, development phase, or have completed their first pilot programs. CBDCs are even already in use in three countries and their number will almost certainly grow in the coming years. Some experts warn that CBDC poses risks associated with loss of privacy, or it may even be a tool for governments to control residents. Why should people adopt CBDC in the first place? Wouldn't we be better off using stablecoins on Cardano? To know the answers, we need to look at why central banks are working on CBDCs. Let's compare CBDC with stablecoins on Cardano. Can these two technologies coexist?


  • CBDCs can be tokenized similarly to USD-backed stablecoins.
  • It is not necessary to look at CBDC and blockchain as two competing solutions but as complementary networks.
  • The CBDC effectively suppresses the right to privacy as well as the right to possess value. Transactions through the Cardano ecosystem can be private and you can own the value.
  • Central banks can retain full control over monetary policy while giving people the freedom to choose what specific networks to use.
  • CBDC tokenization will allow the separation of the needs of central banks from the right to privacy and self-custody.
  • Central banks could mint at least part of the CBDC on SC platforms to make it easier for people to access.

Why are central banks introducing CBDC?

In different parts of the world, the introduction of CBDC may have slightly different reasons. Implementation will vary depending on central bank requirements. Let's look at the main reasons for replacing fiat currencies with a new digital form of money.

  • Enhanced Efficiency: CBDCs can enhance the efficiency of the payment system, reducing transaction costs and processing times, and improving financial inclusion. Transactions could be settled faster and at a lower cost than with traditional payment methods.
  • Reduced Dependence on Cash: CBDCs can potentially reduce dependence on cash, making it easier to track transactions and combat illegal activities such as money laundering and tax evasion.
  • Competition with Cryptocurrencies: CBDCs could provide a safe and stable alternative to cryptocurrencies, which are subject to high volatility and regulatory uncertainty.
  • Financial Inclusion: CBDCs could improve financial inclusion by providing access to banking services for people who are unbanked or underbanked, as they could use their smartphones to hold and transact with CBDCs.
  • Monetary Policy: CBDCs could give central banks more direct control over the money supply, enabling them to implement monetary policy more effectively.
  • Crisis Management: In times of crisis, CBDCs could provide a more efficient and secure way to distribute emergency funds, reducing the risk of fraud and ensuring that funds reach those who need them most.

Let's now go through all the reasons point by point and compare them with stablecoins on Cardano.

Enhanced Efficiency

I remember the days when a bank transfer normally took a day or more and the fees were relatively high. This has improved considerably. The current commercial banks in the country where I live allow you to send an instant transaction with zero fees. Transactions sent abroad are still very slow, expensive, and can fail.

For local transactions, using any decentralized blockchain, including Cardano, will always be more expensive and slower than CBDC. On the other hand, for transactions sent abroad, it is advantageous to use Cardano as the transaction will arrive within a few tens of seconds and the fee will be significantly lower than traditional payment methods.

Blockchain will never be used for local payments as it is inefficient and the current low scalability does not even allow it. Hydra is being built for this purpose. Hydra is a second layer for Cardano that will allow transactions to be sent between multiple users in less than one second and for a fee approaching almost zero. In order to use Hydra for a significant portion of the population of a single country, further technological development is required. This may take several years.

Hydra will allow you to send any tokens minted on the Cardano layer, including DJED and USDA stablecoins (launch planned for Q1 2023). The efficiency (especially speed and cost of transactions) of CBDC and Hydra can be very similar.

The advantage we see is that in the case of Hydra, the fees are unlikely to rise, while the central bank can raise the fees at will from its position of authority. In the Cardano ecosystem, additional second layers may emerge and compete with each other. A competitive environment, as we know, lowers fees and increases quality.

One disadvantage we see is that each central bank will have its own implementation of the CBDC. There will be many new networks that may be incompatible with each other. It may be similarly inefficient as the current financial system. Cardano is a global blockchain, so it can send value in a peer-to-peer fashion between continents. From an efficiency perspective, it would be more advantageous to connect multiple blockchain networks than individual CBDC networks. We can imagine that individual CBDC networks will somehow use public blockchains (and their second layers) to interconnect with each other.

CBDCs can be tokenized similarly to USD-backed stablecoins (which we already use today) and use the blockchain to transfer value. It is not necessary to look at CBDC and blockchain as two competing solutions but as complementary networks.

Transferring value over the internet is easy and new more efficient networks will emerge. More important are the other features and benefits associated with the transfer.

Reduced Dependence on Cash

Central banks hope to reduce their reliance on cash by making it easier to monitor cash flows and combat illegal activity. But it also means constantly monitoring your behavior, i.e. reducing your freedom.

Cash is and will forever remain the most anonymous form of financial transaction, as there is no digital record of it. You actually own the cash and no one can take it from you unless they physically attack you or steal it.

CBDC effectively suppresses the right to privacy and also the right to own value. Stablecoins on Cardano can allow private transactions over the Midnight network and preserve the right to own value.

Ownership of money in a blockchain network is based on cryptography and this is true for most non-custodial services. So it can't happen that someone freezes your account or that someone censors transactions. In the case of CBDC, these can be common methods to not only fight crime but to bully the population by the government or the bank.

Note that at this point there is a huge difference between CBDC and stablecoins on Cardano. Banks and governments may fight against cryptocurrencies in some countries as it may prevent them from achieving their goal. In free countries, people should have the right to privacy and the right to self-custody. Non-democratic governments will want to ban cryptocurrencies because they want to gain control over the population.

If stablecoins are to be an accepted medium of exchange, compromises will have to be found between the requirements of governments and what Cardano will allow. Governments and banks do not want to have money that allows tax avoidance and this must be respected.

It is technologically achievable to build a system that ensures privacy and self-custody while providing proof that transactions are OK from a tax perspective.

Competition with Cryptocurrencies

CBDCs are meant to compete with cryptocurrencies, especially in terms of stable purchasing power. Cryptocurrencies are volatile, according to bankers. Let's admit they're right. Cryptocurrencies are volatile and not suitable for payments. Stablecoins have very similar characteristics to fiat money or what CBDC will have in terms of stability.

Tokenizing CBDC will be much easier than tokenizing fiat currencies. Central banks can directly oversee this themselves if they wish. They can retain full control over monetary policy while giving people the freedom to choose what specific networks to use. Why should people be forced to exclusively use the networks and wallets offered by central banks?

Central banks only need control over monetary policy to achieve their objectives. They certainly do not need to look after the wallets of citizens or even have control over them. At the moment, it is the commercial banks that look after citizens' accounts, not the central bank. The central banks could gain too much power over the citizens, yet it is the elected governments that provide services to the citizens.

Algorithmic stablecoins are a special case, which does not use fiat currencies or CBDC as the underlying asset, but volatile cryptocurrencies. Through Oracles, the market values of selected assets are taken from the physical world.

Algorithmic stablecoins make it possible to create alternative money with stable purchasing power. We can imagine a stablecoin backed by ADA, BTC, ETH, etc. Algorithmic stablecoins are controlled only by algorithms and have no central authority. Perhaps central banks could learn a lesson on how to use digital scarcity to create stablecoins.

Financial Inclusion

Banking the unbanked is one of Cardano's main missions. Blockchains enable financial inclusion by their very nature. They are globally available, anyone can use them without permission from a third party, everyone is equal, etc.

While CBDC will initially be just a network and wallet, decentralized finance (DeFi) services are emerging on Cardano. People can even use a decentralized identity so that a decentralized alternative to most banking services can be created.

What is the goal of central banks? Do they, for example, want to provide the lending business? They would have to know the identity of the citizens and would essentially be taking over the role of states (especially the legal system). The purpose of a central bank is to manage monetary policy, that's all it should be.

Commercial banks are not willing to provide services to poor people in developing countries. They often don't even have ID cards. The same is true for refugees living in the US, for example. The CBDC is not going to make any significant difference. People may get the option to install a digital wallet on which they can hold CBDC, but that's the end of it. Will it be possible to do it anonymously? We don't know at this point. It's certainly better to at least have a digital wallet than not have a bank account. Unbanked people need more than just the ability to hold money. They need micro-loans, for example.

DeFi can allow people not only to hold money and many other assets but also to trade or use them in some way. Financial inclusion can involve things like easy access to a stock exchange, or the ability to lend money to someone else in a peer-to-peer way.

DeFi can provide financial inclusion. It is possible for DeFi services to use CBDC or tokenized CBDC.

Monetary Policy

Through the CBDC, central banks can better control the money supply and be more efficient. Each blockchain network has its own monetary policy, so in a way, CBDC and cryptocurrencies compete.

Cardano allows the issuance of native assets, so it is theoretically possible that a central bank would start minting and burning CBDC on this platform. In an ideal world, this would be one of the best solutions, as Cardano is a decentralized platform that would only allow banks to do basic operations. Basically, just control the money supply through the minting and burning of CBDC tokens.

Unfortunately, we do not live in an ideal world. No government can control Cardano and therefore will not use it to create the CBDC. Central banks want to control the technology solution. It would be nice to see a small developing country take advantage of Cardano in this way, but it certainly won't happen in the case of large countries.

We can imagine some hybrid solution where the central bank will have its own system for printing CBDC but at the same time mint some of the CBDC directly on SC platforms to make it easier for people to access it. Blockchain could be used for easier access to CBDC by people all over the world. This could be useful for currencies that are internationally considered reserves.

Crisis Management

In the event of a crisis, it is important to get the money where it is needed most quickly and in a targeted manner. The CBDC makes this much easier. It is important to note that this often involves printing new money, so inflation is a consequence of this measure. On the other hand, it is important to mention that in some critical cases, it may be necessary to avert an even bigger disaster.

Some people warn that while banks can send money directly to our wallets in a crisis, they can also dictate what we are supposed to spend it on. If central banks print money, they want to withdraw it from circulation. How will this happen? Can banks take money out of our wallets? Or tell us when to spend it?

We return to what has already been written. Let the banks retain control over monetary policy, but they must not have control over the citizens' wallets. If there is some smart integration between CBDC networks and blockchain networks, central banks can send money specifically to those they need. Technologically, this is possible.


The CBDC can take away our freedom if central banks gain control of citizens' wallets. We should defend ourselves against this by all means possible. CBDCs are very likely to be launched in most of the world. There is no stopping their emergence at the moment. From our point of view, central banks should only control monetary policy. Neither banks nor governments should have control over citizens' wallets, and certainly not tell them what to spend their money on and by when. There should certainly be the possibility of self-custody of money. Not all people need to take advantage of this option, but no one should stop those who want to. CBDC tokenization essentially allows the separation of central bank powers from citizens' rights. Let us fight and push for this option.


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