Central bank digital currencies (CBDCs) can work well with decentralized finance (DeFi) and they have a lot of potential to fuel DeFi adoption, according to a Swiss central bank official.
Among many different types of digital currencies, according to Swiss National Bank (SNB) board member Thomas Moser, CBDC could offer more stability and lower risks for the development of DeFi.
To thrive, DeFi needs stable money, which is why stablecoins were invented, and stablecoins have clearly helped DeFi become more popular, Moser told Cointelegraph.
Despite being polar opposites, centralization and decentralization can actually work together in digital currencies, as centralization is not bad for DeFi, Moser argued. He noted that major stablecoins like Tether (USDT) and USD Coin (USDC) are the most used stablecoins in DeFi, both of which are centralized.
“Therefore, ‘something centralized’ has already helped DeFi a lot,” the SNB official explained.
Unlike Tether or USD Coin, a CBDC for DeFi would entail lower risks than a redeemable stablecoin, as central bank money “entails no counterparty risk,” Moser said. “A central bank cannot go bankrupt because it is issuing irredeemable money,” he added.
Other types of digital currencies, including cryptocurrencies such as bitcoin (BTC) or ether (ETH), are also non-redeemable, implying no counterparty risk. However, their price is not stable enough to support sustained DeFi growth, the official noted.
“Algorithmic stablecoins would not introduce counterparty risk either, but so far we have not seen any successful algorithmic stablecoins,” Moser said, citing the May 2022 collapse of TerraUSD (UST). “A CBDC could offer more stability and lower risk than stablecoins ‘ the officer added.
Moser’s comments came shortly after the SNB and blockchain firm Cypherium released a joint paper on blockchain technology and CBDC on Sept. 26. The study concluded that CBDCs could serve as a useful tool to stabilize the cryptocurrency economy, including the DeFi sector.
The paper specifically mentioned recent statements by Banque de France Governor François Villeroy de Galhau, who argued that CBDC “is not about the big brother of central banks that threaten the free world of decentralized finance.” He stressed that CBDCs would be more about “providing more tools to make DeFi successful and sustainable.”
Sky Guo, CEO of Cypherum, expressed confidence that the combination of DeFi and CBDC technology “is destined” to explain:
“DeFi is fully automated and can free CBDC from human limitations. If CBDC is used in DeFi, we can expect hundreds and trillions of dollars of liquidity to be injected into this market, large institutions to enter this space, and real assets to move along the chain.”
The SNB’s study isn’t the first time a central bank has pondered possible interactions between CBDCs and DeFi. In April 2022, central bank officials discussed possible interactivity between DeFi-based markets and CBDC at a conference co-hosted by the Innovation Hub of the Bank for International Settlements and the SNB.
Related: DeFi can take a cue from traditional finance to lower risk, says ex-Morgan Stanley ex-executive
As previously reported, the general public largely rejects the idea of CBDC due to the lack of privacy associated with it, with many referring to such projects as “slave coins”. It remains to be seen if central banks are really willing to help DeFi adoption as the world hasn’t seen too much support for crypto from central banks yet.
The news comes amid major European banks that continue to test cross-border retail and remittance payments using CBDC. On September 28, the central banks of Sweden, Norway and Israel announced another project to test international payments in CBDC.