Decentralized finance (DeFi) and Central bank issues digital currencies (CBDCs) can work very well with each other. In fact, many countries are now exploring the option to issue a digital version of their currency which could also boost Defi adoption. A Swedish Central banker also agrees with the scenario.
The development of DeFi might be more stable and less risky with CBDCs, according to Thomas Moser, a board member at the Swiss National Bank (SNB), who was speaking to a news publishing house. DeFi needs a steady stream of funding to expand, so businesses shouldn’t sometimes provide staking rates that are too high (up to 30% annually). According to Moser, stablecoins which are the most stable of all cryptocurrencies, have helped DeFi get to where it is now.
Although they (CBDCs and stablecoins) are totally opposite, Moser stated that centralization and decentralization in digital currencies might actually complement one another because centralization is good for DeFi. He pointed out that the most popular stablecoins in DeFi are Tether (USDT) and USD Coin (USDC)— both of which are centralized in a way (pegged to the US dollar).
“Therefore, ‘something centralized’ has already helped DeFi quite a lot.”
The general public, on the other hand, has been strongly opposed to the concept of CBDC because of the inherent lack of privacy, with many referring to such initiatives as “slavecoins.” Because there hasn’t been a lot of central bank backing for cryptocurrencies, it is still unclear whether they will actually help with the adoption of DeFi.
A CBDC would provide fewer risks for DeFi than a redeemable stablecoin since, in contrast to Tether or Circle, central bank money “does not include counterparty risk.” To justify his statements he said that since central banks are “irredeemable” organizations, they can never go “bankrupt.”
Although there hasn’t yet been a successful algorithmic stablecoin (referring to the collapse of TerraUSD (UST)), according to Moser, a successful one wouldn’t have counterparty risk. However, he concluded by conveying that CBDCs would be a better instrument to boost the adoption of DeFi.
The analysis conducted by the SNB is not the first time a central bank has considered potential linkages between CBDCs and DeFi. At a seminar jointly organised by the SNB and the Innovation Hub of the Bank for International Settlements in April 2022, representatives from central banks explored potential interaction between DeFi-based markets and CBDCs.