Central bank digital currencies (CBDCs) can work well with decentralized finance (DeFi) and have great potential to accelerate DeFi adoption, according to a Swiss central bank official.
According to Thomas Moser, board member of the Swiss National Bank (SNB), a digital currency from the central bank can provide more stability and reduce the risk of developing DeFi, among the many different types of digital currencies.
Moser told Cointelegraph that DeFi needs stable money to grow, which is why stablecoins were invented, and apparently stablecoins helped DeFi become more popular.
Although centralization and decentralization in cryptocurrencies are opposites, Moser says they can work together because centralization is not so bad for DeFi. He noted that major stablecoins such as Tether (USDT) and USD Coin (USDC) are the most widely used stablecoins for DeFi, both of which are centralized.
“So a ‘central thing’ has really helped DeFi a lot,” said an SNB spokesperson.
Unlike Tether or the US dollar, central bank digital currency has less risk to DeFi than redeemable stablecoins because central bank money “doesn’t carry counterparty risk,” Moser said. He added: “The Central Bank cannot fail because it issues paper money.”
Other types of digital currencies, including cryptocurrencies such as Bitcoin (BTC) or Ether (ETH), are also non-tradable, which does not involve counterparty risk. However, the official noted that the price is not stable enough to support the steady growth of DeFi.
“Algorithms also don’t have counterparty risk, but we haven’t seen successful algorithmic stablecoins yet,” Moser said, referring to the TerraUSD (UST) crash in May 2022. The official added.
Moser’s comments come shortly after the Swiss central bank and Cypherium released a joint paper on blockchain technology and CBDCs on September 26. The study concluded that central bank currencies can serve as a useful tool to stabilize the cryptocurrency economy, including the DeFi sector.
The document specifically refers to recent comments by Banque de France Governor François Villeroy de Gallo, who argued that the central bank “is not about the big brother of central banks that threatens the free world of decentralized finance.” He emphasized that CBDCs prefer “to provide additional tools to make DeFi successful and sustainable.”
Sky Guo, CEO of Cypherum, expressed confidence that the combination of DeFi and CBDC technology is “trending to happen,” saying:
“DeFi is fully automated and can free CBDC from human limitations. With the use of CBDCs in DeFi, we can expect hundreds and trillions of dollars of liquidity entering this market, large institutions entering this space, and real assets will move up the chain.”
The SNB study is not the first time the central bank has considered a possible interaction between CBDCs and DeFi. In April 2022, central bank officials discussed potential synergies between DeFi and CBDC-based markets at a conference hosted by the Innovation Center of the Bank for International Settlements and the Swiss National Bank.
Related: DeFi Can Take Advice from Traditional Finance to Mitigate Risk, Says Former Morgan Stanley CEO
As previously reported, the idea of a digital central bank currency is largely opposed by the general public due to the lack of privacy that comes with it, with many referring to such projects as “slave coins.” It remains to be seen if central banks are really willing to contribute to DeFi adoption as the world has yet to see much support for cryptocurrencies from central banks.
The news comes as major European banks continue to test cross-border retail and money transfers with central bank digital currencies. On 28 September, the central banks of Sweden, Norway and Israel announced a new project to test international payments in central bank currencies.
