Why some nations are choosing stablecoins over CBDCs

Recently, Kyrgyzstan announced its commitment to becoming a fintech, crypto-friendly nation by ditching its plans for central bank digital currencies (CBDCs) and instead introducing a gold-backed stablecoin. The news comes as an interesting example of what the year 2025 could look like for CBDCs. Last year, CBDCs were a hot topic. Dozens of pilot programs and regional focus groups were launched across the world to bring CBDCs to life. 

Why did Kyrgyzstan change its mind, how does that decision relate to their situation, and what could it tell us about ‘stablecoins vs CBDCs’?

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CBDCs vs stablecoins

First, what are the key differences between stablecoins and CBDCs?

1. Control. Stablecoins are typically issued by decentralized organizations or by private companies. CBDCs are managed by central banks. 
2. Decentralized vs centralized. Stablecoins are typically decentralized, and CBDCs are centralized. 
3. Speed of change. Stablecoins can be innovative and flexible, driven by private sector investment. CBDCs often move more slowly due to needing to be integrated into a centralized banking system and managed as a public service. 
4. Privacy. CBDCs offer less privacy, with a heightened traceability so that central authorities can oversee transactions. Stablecoins can be made private or as traceable as whoever issues them needs or wants. 

Kyrgyzstan’s new plans involve a gold-backed stablecoin, called the Gold Dollar (USDKG), merging the commodity of gold with the speed and flexibility of the blockchain. 
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Why Kyrgyzstan?

Kyrgyzstan stands out in Central Asia for its crypto use due to a number of factors that limit other options and push through much-needed innovation. With tough sanctions imposed on Russia, one of Kyrgyzstan’s main trading partners, foreign trade transactions in fiat currency are complicated and expensive, or sometimes impossible, as financial institutions try to avoid secondary sanctions from doing business with Russia. To solve this issue, stablecoins have become increasingly popular. Not only do stablecoins remove a lot of inflation uncertainty, but it is also possible to do a cross-border transaction in stablecoin whilst still creating the necessary legal paperwork for accounting and tax authorities. It is also a unique nation in Central Asia because many other countries have completely banned crypto or zero regulation. Uzbekistan is much more focused on industry around the mining of cryptocurrencies rather than the utilization of them, and other nations such as Turkmenistan or Tajikistan have zero acknowledgment of digital assets, instead forcing the use of their own currencies. 

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Why did Kyrgyzstan change its mind?

‍As recently as August of last year, Kyrgyzstan was making moves to create the digital som, a central bank digital currency. In six months, that attitude has been fully reversed. Why was that the case? Although there has been no clear explanation as to exactly why, it seems likely that these factors were involved: 

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International trade. As detailed previously, stablecoins are a much quicker, cheaper option for cross-border transactions during political instability and financial sanctions. A nation’s CBDC can also be included in political sanctions, making it as difficult as fiat currency. 

‍Attracting foreign investment. With limited trade with its biggest neighbor, Kyrgyzstan needs innovation and variety. With a crypto-friendly government and a number of crypto companies opening in the country, a gold-backed stablecoin and open regulation could bring beneficial foreign investment to boost its tech and financial sector. 

Stability. Gold is recognized as safe haven asset, offering a stable store of value against economic turbulence. By utilizing a gold-backed stablecoin, a higher level of stability and trust is created and allows for a more secure hedge against inflation, currency devaluation, or international trade issues.

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What does this tell us about the global CBDC race?

The Kyrgyzstan story tells us a lot about the progression of CBDCs globally. Kyrgyzstan’s decision demonstrates that they are not always the right solution to certain specific needs. It looks increasingly like 2025 is the year of the stablecoin, with everyone from governments to private entities looking to forge a path. Stablecoins offer more variety and adaptability to unique circumstances, such as economic sanctions or local inflation. 

That’s not to say that CBDCs will completely fall out of favor. For many countries and economic regions, CBDCs are the most effective and easy way to incorporate fintech innovation in a way that is safe, secure, and transactional across borders. But with some CBDC projects such as China's failing to gain public interest and other nations such as the United States of America choosing an administration outright banning central banks from exploring the option, Kyrgyzstan’s example shows that there are other options. The situation does not even have to be stablecoins vs CBDCs war, but a more nuanced and unique approach that takes into account the needs and dreams of particular countries and the positives and negatives of either path.

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