Central bank digital currencies (CBDCs) can work well with decentralized finance (DeFi), and they have a lot of potential to drive DeFi adoption, according to a Swiss central bank official.
Among the many types of digital currencies, it is the CBDC that could provide more stability and reduce risks for the development of DeFi, according to Thomas Moser, member of the board of directors of the Swiss National Bank (SNB).
To grow, DeFi needs stable money, which is why stablecoins were invented, and stablecoins clearly helped DeFi become more popular, Moser told Cointelegraph.
Despite being polar opposites, centralization and decentralization in digital currencies can actually work together because centralization is not bad for DeFi, Moser argued. He noted that major stablecoins like Tether (USDT) and USD Coin (USDC) are the most widely used stablecoins in DeFi, both of which are centralized.
“Therefore, ‘something centralized’ has already helped DeFi a lot,” the SNB official said.
Unlike Tether or USD Coin, a CBDC would entail lower risks for DeFi than a redeemable stablecoin because central bank money “does not entail counterparty risk,” Moser said. “A central bank cannot go bankrupt, since it issues irrecoverable money,” he added.
Other types of digital currencies, including cryptocurrencies like Bitcoin (BTC) or Ether (ETH) are also uncollectible, which does not involve any counterparty risk. However, their price is not stable enough to support sustainable DeFi growth, the official noted.
“Algorithmic stablecoins also wouldn’t incur counterparty risk, but so far we haven’t seen any successful algorithmic stablecoins,” Moser said, referring to the collapse of TerraUSD (UST) in May 2022. “A CBDC could offer more stability and lower risks than stablecoins,” the official added.
Moser’s remarks came shortly after the SNB and blockchain firm Cypherium published a joint article on blockchain technology and the CBDC on September 26. The study concluded that CBDCs could serve as a useful tool to stabilize the cryptocurrency economy, including the DeFi sector.
The document specifically mentions recent remarks by the Governor of the Banque de France, François Villeroy de Galhau, who argued that the CBDC is “not the big brother of central banks threatening the free world of decentralized finance”. He pointed out that CBDCs would instead be concerned with “providing other tools to help make DeFi successful and sustainable.”
Cypherum CEO Sky Guo expressed confidence that the combination of DeFi and CBDC technology is “destined to happen,” stating:
“DeFi is fully automatic and can free the CBDC from human limitations. With the CBDC used in DeFi, we can expect hundreds and trillions of dollars of liquidity to be introduced into this market, with large institutions entering this space and real-world assets moving on-chain.
The SNB study is not the first time that a central bank has considered possible interactions between CBDCs and DeFi. In April 2022, central bank officials discussed the potential interactivity between DeFi-based markets and the CBDC at a conference co-hosted by the Bank for International Settlements Innovation Hub and the SNB.
Related: DeFi can take inspiration from traditional finance to reduce risk, says former Morgan Stanley executive
As previously reported, the general public has largely opposed the idea of CBDC due to the lack of privacy associated with it, with many referring to projects such as “slavecoins”. It remains to be seen whether central banks are truly willing to help drive DeFi adoption as the world has yet to see too much support for crypto from central banks.
The news comes as major European banks continue to test cross-border retail and remittance payments with the CBDC. On September 28, the central banks of Sweden, Norway and Israel announced another project to test international payments in the CBDC.