When South Korea reportedly halted its digital currency pilot programme this week in favour of stablecoins – cryptocurrencies pegged to a reference asset, typically a fiat currency – it sent shock waves through central banks across the world.
At first glance, stablecoins appear to have similar qualities to the digital yuan or other digital currencies, but there are significant differences in their design, purpose and management.
What distinguishes stablecoins from the digital yuan?
First piloted in 2020, it had been used in 26 cities for transactions worth a total of 7 trillion yuan (US$977 billion) by June last year.
The digital yuan is largely intended for small domestic retail payments, and it cannot be exchanged for foreign currencies. Its cross-border use is being developed through the mBridge project, coordinated by the multinational Bank for International Settlements.
Unlike the digital yuan, which is entirely under the umbrella of a central bank, stablecoins are blockchain-based and privately issued cryptocurrency tokens pegged to fiat currencies like the United States or Hong Kong dollars. Issuers hold reserve assets, such as US Treasury bills, to back the total value of the tokens at a ratio of one to one.
