With the recent increase in news regarding the Federal Reserve having concrete plans to release a Central Bank Digital Currency (CBDC), some people are starting to wonder what exactly the difference is between Reserve tokens (RSV) and CBDCs. Furthermore, every once in a while we get questions comparing RSV to traditional stablecoins (USDT, TUSD, USDC, PAX, IRON, …).
This post serves to clear up any misconceptions regarding RSV as a stable currency and propose an idea about why the Reserve community believes RSV to be a superior currency compared to any other existing stable currencies (fiat or crypto). This post therefore aims to provide an answer to the following questions:
Will RSV still be relevant once CBDCs are released?
What benefit does RSV have compared to CBDCs?
Why do we need RSV if we already so many existing stablecoins?
Will RSV really be stable in the long term?
Could a major depegging happen to RSV just like what happened to Iron, Terra, etc?
In order to be able to answer these questions it would be helpful to first determine what makes a “good” stable cryptocurrency, or even what the requirements are in order to have a currency that is viable to be used by many people as a store of value. From the research I have done, these are the four pillars that define such a stable cryptocurrency:
It needs to be easy to access for all.
Its value needs to be stable at all times.
It needs to be independent from(*) and resistant against shutdown by governments.
Its circulating value needs to be backed by atleast 100% of collateral assets at all times.
Now let’s look into detail how RSV, CBDCs, and fiatcoins compare based on these four pillars.
Please keep in mind that all statements made in this post are only those of my own. I do not have any official affiliation with Reserve and thus can not speak on their behalf. As a fan of the Reserve protocol, my views are biased towards it. I could also be wrong about any claims made in this post. Please apply your own judgement.
A currency that aims to be a stable store of value for the masses needs to be easily accessible not only to crypto-fanatics but also to the general public. I would argue that CBDCs will probably be very easy to access through a government-issued smartphone app and thus match this category.
I would also argue that existing stablecoins are not that easy to obtain for non-crypto fanatics. Besides the fact that it is not always a given that stable cryptocurrencies can be purchased with depreciating currencies like the Venezuelan Bolivar and the Argentine Peso, the user interfaces of existing crypto applications are often not userfriendly enough for non-crypto fanatics.
Sure, you and I know that stablecoins can be purchased with Venezuelan Bolivares through Spanish Binance, but do you see your mother, grandmother, uncle, and other family members use Binance’s user interface? I personally don’t see that happening; many people are not tech-savy and will be scared away by what they perceive as a complex user interface.
The Reserve app has one of the simplest user interfaces I have seen from any financial smartphone app so far and thus matches this category from my point of view. If you are interested, take a look at this demonstration by a Venezuelan Reserve app user.
2. Stable value
Probably the most important aspect of a stablecoin is that its value can remain stable at all times. This means that its purchasing power remains the same both in the short term aswell as in the long term.
While it may seem logical that a stablecoin remains stable, recent history shows that keeping a cryptocurrency stable is actually not that easy of a task. Cryptocurrencies like NuBits, Iron Finance and Terra recently lost their peg, causing its users unable to redeem the full value of their money for months.
While a CBDC will probably be stable in the short term (as an extension of the existing fiat currency), in the long term all fiat currencies are prone to inflation. Mismanagement of monetary policy could even lead to hyperinflation - yes, even with currencies like the USD or the EUR. Keep in mind that every major currency used by every major empire in history has failed along with the downfall of that empire. To assume that history will not repeat itself would be a positive, but somewhat naïve outlook on the future.
My personal opinion is that all fiat currencies, and thus all cryptocurrencies pegged to these fiat currencies are a great solution for now, but will not stand the test of time. A currency that qualifies as a long-term global reserve currency needs to expand and shrink along with the global economy, not separate from it.
If you think about what money is, it really is just a way to record favours done between people. If you build a house for another person, thus providing them with warmth and safety (= doing them a favour), you get “favour points”. You can then give some of these “favour points” to let someone cook you a meal, providing you with a full stomach (= a favour done to you). Money is a way to track favours and thus the value of money should - in a utopia - be valued at (for example) one hour of labour.
As there are many different ways to provide value to others - not only through hard labour - defining the value based on labour is not something feasible. Thus, the next best thing is to define the value of money by owning a small percentage of the entire economy. If you build me a house, I will give you 0,00001% of the economy. If I make you a meal, you give me 0,00000001% of the economy, and so on… The economy here actually refers to a basket of goods that represents all assets in the economy (e.g. X% of all the gold in the economy, Y% of all the real estate in the economy, Z% of all the equities in the economy, and so on).
Reserve aims to do just that with RSV. In the long term, the value of RSV will be entirely determined by a basket of 50+ tokenized assets which will closely index the global economy. A currency like this will become a superior global store of value to any fiat money, as it would not undergo inflation. If you’d like to know what this basket will look like, take a look at this image.
Conclusion: as an extension of existing fiat currencies, CBDCs and Fiatcoins are a good enough short-term solution. However, in order to have a currency that withstands the test of time, both CBDCs and Fiatcoins are not a feasible applicant for the world’s reserve currency.
3. Independent from(*) and resistant against shutdown by governments.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
- Satoshi Nakamoto
As cryptocurrency fanatics, a lot of us might be biased by saying that a currency needs to be entirely independent from any government. In contrast, many would argue that governments provide a good, much needed, role in the management of existing currencies.
Personally, I haven’t researched it enough in order to make a valuable statement regarding its independence for all governments. What I do know for sure is that some governments play a devastating role in regards to the management of certain currencies. I also know that, in order for the world to have a stable, trustworthy reserve currency, it needs to be out of the hands of these mal-intented governments and thus should not be able to get shut down by them.
As CBDCs will be issued entirely from central banks (and thus governments), they do not match this category. Furthermore, the consensus model for CBDCs will probably not be decentralized in the same way as most existing cryptocurrencies. Validators of transactions will most likely consist of a small network of government-owned nodes.
For Fiatcoins the story is more complicated. It depends partially on the decentralization of their collateral. One could argue that stablecoins like USDC - which keep collateral dollars in US bank accounts - are too easy to be shut down by the government. If the US government decides it does not like USDC (for example because it sees it as a threat to their capital control), they can simply block/freeze these bank accounts.
To combat the issue of possible government shutdown, Reserve aims to spread out the Vault collateral over multiple jurisdictions. Here’s an interesting quote from the Reserve whitepaper regarding the diversification of the Reserve Vault.
4. Backed by atleast 100% of collateral assets at all times.
Last but not least, a currency that qualifies as a global reserve currency needs to be entirely backed by assets in some kind of bank or vault. Not backing a currency by atleast 100% of its circulating supply can cause major issues in the case of a bank run, of which the world experienced about six during the 2010s. When, for example, only 70% of the circulating supply is backed by actual assets, 30% of people will come out empty-handed in a bank run.
This category mostly applies to RSV vs. Fiatcoins, as the backing of Fiatcoins is often a large point of debate. As CBDCs are an extension of fiat currency, and fiat currencies are not backed by anything, it does not match this category - but perhaps it doesn’t need to. Since the abandoning of the gold standard in the 1930s (atleast for GB and the USA), the system of non-backed currencies works because everyone in that system trusts the other to give value for that currency. Up to now, this system has worked mostly great in developed countries.
For Fiatcoins, however, I would argue that the backing of tokens/coins is crucial. People will only want to “try out” a new currency if they are guaranteed that they can preserve their purchasing power even if that new currency would fail.
Many existing stablecoins have failed in this regard. Stablecoins like Terra or Iron Finance have chosen volatile assets without sufficient overcollaterization as the backing for their stablecoin. As a result, when the value of these volatile assets sharply decreased, their stablecoin lost its peg.
A similar story can be seen with Tether which for years now has been under heavy fire for its poor backing. In a recent showing of their vault assets, it became clear that Tether’s vault only contains ~75% cash-like assets - 65% of which are unknown commercial paper (it is unclear what the ratings are on them and Tether declined to identify the borrowers of the loans or the collateral backing them).
Reserve aims to have all RSV in circulation backed by atleast 100% of collateral assets spread over different asset classes, issuers and jurisdictions. This portfolio will be optimized for stability with low-yield (in contrast with Tether’s portfolio) and will be fully inspectable on the blockchain. To read more about the setup of the portfolio, check out this quote.
Conclusion: in order for a stablecoin to be viable as a reserve currency, it needs atleast 100% backing of diversified, stable assets.
Reserve consciously decided to create a new stablecoin even though so many already existed in the market. The easier decision would have been to develop the Reserve app and use any other existing stablecoin to transact within. Such a decision is only made from a clear conviction that the existing solutions do not suffice.
From an economic perspective, RSV is the number one candidate not only to resolve hyperinflation in countries in Latin America, but also to become a global reserve currency that can withstand the test of time. My personal opinion is that, if executed properly, Reserve can become the world’s immune system for hyperinflation in the short term and the world’s global reserve currency in the long term.