Like many countries around the world, Australia has been exploring the potential use of CBDCs in partnership with key industry players, including Mastercard.
In its latest announcement on Australia’s CBDC pilot, Mastercard said it has demonstrated technology that would allow central bank currencies to be “wrapped” for use on different blockchains.
In cryptocurrency jargon, wrapping refers to the process of porting assets from one blockchain to another by locking up tokens at one end and minting fresh tokens that represent the locked assets on a different chain.
The most well-known instance of token wrapping is Wrapped Bitcoin (WBTC), an Ethereum-based token that represents locked Bitcoin one-for-one.
Mastercard’s proof-of-concept for CBDC wrapping points to a potential future in which fiat and cryptocurrencies are more intertwined than ever before.
If the world embraces CBDC technology and fiat currencies go digital on a large scale, Mastercard’s solution could help them colonize huge swathes of the cryptosphere.
In the future, wrapped CBDCs could even compete with stablecoins as Web3’s currency of choice.
In theory, stablecoins should be swappable one-for-one with the fiat currency they represent. But in practice, that hasn’t always been the case. And stablecoins have often become depegged from the fiat currency they are meant to track.
During the most extreme stablecoin depegging event on record, the value of Terra’s UST crashed to nearly zero in May 2022.
In contrast, the closest WBTC ever came from decoupling from BTC was during the height of the FTX crisis, when the token traded at a 1%-2% discount compared to the cryptocurrency it represents.
Although such a fall in the price of WBTC amounted to hundreds of dollars per token, advocates of the technology pointed out that WBTC could always be unwrapped, and that the issuer’s Bitcoin reserves can be verified on-chain.
On the other hand, whether they are backed by fiat-based or digital assets, Stablecoins require a degree of trust in the issuer.
In the case of fiat-backed coins like USDT, there is little transparency into the cash holdings of issuing companies like Tether. Meanwhile, stablecoins like Dai, which are collateralized solely by digital assets, have no guaranteed fiat cashout mechanism, which can be offputting for some investors.
If fiat currencies get a digital makeover, wrapped CBDCs could replicate many of the advantages of stablecoins, such as easy transferability and access to DeFi investment opportunities. However, with on-chain visibility into the reserves that back the wrapped assets, they would overcome some of the trust issues associated with stablecoins.
Ultimately, money is always a token of trust. And for the most part, the central banks of the world’s major economies remain some of the most trusted institutions in the world.
The US dollar remains stable because people trust the Federal Reserve. If they didn’t, the global economy as we know it would break down.
And despite a rising anti-CBDC movement among the Republican party, in places like Australia, it looks increasingly likely as if people will eventually be asked to trust central CBDCs the same way they trust paper money today.
Incidentally, libertarian distrust of central bankers could help prop up demand for stablecoins if wrapped CBDCs ever threaten to replace them.
The technology recently showcased by Mastercard “demonstrated the platform’s ability to implement controls – even on public blockchains.” Specifically, the card company said it implemented an “allow list” during the trial whereby only Know-Your-Customer verified wallets were able to interact with the wrapped tokens.
While diehard crypto-libertarians remain suspicious of central banks’ incursions into the blockchain space, for institutional investors and many everyday users, wrapped CBDCs promise to transport mainstream trust in central banks to the crypto economy.