CBDCs are settlement layers. They will function as programmable, wholesale central bank money for interbank transfers, not as consumer-facing retail wallets. This mirrors the role of Fedwire or TARGET2 in traditional finance.
e-commerce-and-crypto-payments-future
Blog
Why CBDCs Will Co-opt, Not Replace, Private Stablecoins
A technical analysis of the emerging financial stack: CBDCs as the regulated, high-assurance settlement rail, and programmable private stablecoins as the dominant layer for commercial logic, DeFi, and cross-border innovation.
introduction
THE REALITY
Introduction
Central Bank Digital Currencies will not kill private stablecoins; they will become their primary on-chain settlement rails.
Private stablecoins are application layers. Protocols like USDC (Circle) and USDT (Tether) will remain the dominant user-facing assets, leveraging CBDC rails for finality. This separation of concerns is efficient and politically expedient.
The precedent is tokenized deposits. Projects like JPMorgan's JPM Coin and the Regulated Liability Network blueprint prove the model: a regulated ledger for institutional settlement with private-issued tokens for user interaction.
Evidence: The ECB's wholesale DLT trials show central banks prioritize programmability and atomic settlement for institutions, not competing with PayPal or Venmo for retail payments.
thesis-statement
THE ARCHITECTURE
The Core Argument: A Two-Tiered Monetary Stack
CBDCs will function as a regulated settlement layer, while private stablecoins will dominate the application layer due to superior innovation and liquidity.
CBDCs as Settlement Rail: Central bank digital currencies will not compete for user-facing applications. Their primary function is programmable settlement infrastructure for regulated financial institutions, creating a new monetary base layer with embedded compliance.
Private Stablecoins as App Layer: The innovation velocity of private entities like Circle (USDC) and Tether (USDT) is unmatched. They will continue to build the critical DeFi primitives, wallets, and cross-chain bridges (e.g., LayerZero, Wormhole) that users and developers actually use.
Liquidity Beats Mandates: A state-issued token cannot replicate the global liquidity network of private stablecoins. The deep, 24/7 pools on Uniswap, Aave, and Curve are a defensible moat that central banks have no incentive to build.
Evidence: The US Federal Reserve's 'FedNow' service is a blueprint—a back-end settlement system for banks, not a consumer-facing app. This institutional/retail bifurcation is the model for the two-tiered stack.
key-trends
WHY CBDCS WILL CO-OPT, NOT REPLACE
Market Context: The Inevitable Bifurcation
Central Bank Digital Currencies will not compete with private stablecoins on their own turf; they will absorb their utility into a new, bifurcated financial stack.
01
The Problem: Regulatory Capture of the Settlement Layer
CBDCs will become the mandatory, programmable base layer for large-value interbank and wholesale finance. This co-opts the core value proposition of permissioned enterprise chains like JPM Coin or Canton Network.
- Wholesale CBDCs will enforce KYC/AML at the protocol level.
- Programmability enables automated tax withholding and compliance hooks.
- Private chains become application layers atop a sovereign-controlled ledger.
100%
KYC Enforced
T+0
Settlement
02
The Solution: Private Stablecoins as the Risk-Taking Application Layer
USDC, USDT, and decentralized stables will dominate consumer DeFi, cross-border retail, and speculative activity. They become the high-velocity, censorship-resistant layer for everything CBDCs forbid.
- Capital efficiency via on-chain lending (Aave, Compound).
- Composability with DeFi primitives and smart contracts.
- Global access without direct central bank liability, absorbing ~$150B+ in current demand.
$150B+
TVL
24/7
Markets
03
The Wedge: Programmable Privacy & Off-Chain Proofs
The bifurcation creates demand for privacy tech that bridges both worlds. Projects like Aztec, Mina, and zk-proof aggregators will enable compliant privacy by verifying rules without exposing data.
- Selective disclosure: Prove regulatory compliance without revealing full transaction graphs.
- Institutional DeFi: Use CBDCs for settlement with private stables for leveraged positions.
- This tech stack becomes the essential plumbing between the two monetary layers.
ZK-Proofs
Tech Core
~1-2s
Proof Gen
04
The Inevitable Outcome: A Two-Tiered Monetary System
This isn't winner-takes-all. It's specialization: CBDCs for sovereign control and compliance, private stables for innovation and market efficiency.
- Tier 1 (Sovereign): Digital Yuan, Digital Euro for taxes, benefits, core banking.
- Tier 2 (Market): USDC, DAI for trading, lending, global commerce.
- The bifurcation is already visible in the divergence between permissioned DeFi (Polygon Supernets) and permissionless DeFi (Ethereum L2s).
Tier 1 & Tier 2
System Design
Co-existence
End State
WHY CO-OPTION IS INEVITABLE
Architectural Divide: CBDC vs. Private Stablecoin Design Goals
A first-principles comparison of core design imperatives, revealing why central banks will integrate private rails rather than compete directly.
| Architectural Imperative | Wholesale CBDC (e.g., Project Agorá) | Retail CBDC (e.g., Digital Euro) | Private Stablecoin (e.g., USDC, USDT) |
|---|---|---|---|
Primary Objective | Interbank settlement efficiency & monetary policy tool | Sovereign digital cash & financial inclusion | Global liquidity & programmable finance |
Settlement Finality | Real-time gross settlement (RTGS) on central bank ledger | Central bank direct liability, instant finality | Depends on underlying chain (e.g., Ethereum 12s, Solana 400ms) |
Programmability Layer | Limited smart contracts for regulated DeFi (Project Agorá) | Basic conditional logic (e.g., expiry dates) | Full Turing-complete smart contracts (EVM, SVM) |
Privacy Model | Pseudonymous for banks, full visibility for regulator | Tiered identity (e.g., ECB's 'holding limits') | Pseudonymous/on-chain transparent, with mixers (Tornado Cash) |
Cross-Border Interop | BIS-led multi-CBDC platforms (mBridge) | Bilateral linkages (e.g., Nexus) or indirect via banks | Native via permissionless bridges (e.g., LayerZero, Wormhole, Circle CCTP) |
Liquidity Access | 9am-5pm, weekdays, for licensed institutions | 24/7 for verified citizens/residents | 24/7/365 for anyone with an internet connection |
Innovation Velocity | 5-10 year roadmap, committee-driven | 3-5 year pilot phases, legislative approval | Continuous deployment, governed by DAOs or corporate dev teams |
Primary Risk Vector | Systemic cyber attack on financial core | Surveillance & control overreach | Smart contract exploit or reserve insolvency |
deep-dive
THE INCENTIVE MISMATCH
The Technical and Regulatory Reality of Co-option
CBDCs will integrate private stablecoin rails for user acquisition and innovation, not compete directly with them.
CBDCs lack distribution networks. Central banks possess monetary authority but not consumer-facing infrastructure. They will co-opt the existing liquidity and user bases of USDC and USDT to achieve adoption, avoiding the massive cost of building new wallets and exchanges from scratch.
Private stablecoins are regulatory sinks. Protocols like Circle and Tether absorb the immense compliance overhead of KYC/AML and cross-border rules. A CBDC can outsource this risk by settling on-chain through these vetted entities, using them as permissioned settlement layers.
The model is interoperability, not replacement. A CBDC will function as a wholesale settlement asset for regulated entities, while private stables serve as the retail-facing, programmable money. This mirrors the existing TradFi correspondent banking system but on a shared ledger.
Evidence: The EU's pilot for a digital wholesale euro explicitly targets interbank settlement, not consumer wallets. This design necessitates integration with private sector payment service providers (PSPs) and existing stablecoin liquidity pools to function.
counter-argument
THE GOVERNANCE REALITY
Steelman: Couldn't a CBDC Just Do It All?
CBDCs will absorb private stablecoin innovations for state-controlled efficiency, not replace their permissionless utility.
CBDCs are programmable policy tools, not neutral settlement layers. Their primary design goal is monetary policy enforcement and transaction surveillance, which directly conflicts with the censorship-resistant rails that protocols like MakerDAO and Aave require for collateral.
Private stablecoins are regulatory arbitrage vehicles. They exist because the legacy financial system's compliance overhead is prohibitive. A CBDC cannot replicate the permissionless composability that lets USDC on Arbitrum interact with Uniswap pools without a central gatekeeper.
The co-optation is already happening. Jurisdictions like Singapore's Project Guardian are testing wholesale CBDCs for interbank settlement while explicitly allowing regulated stablecoins for retail DeFi. This creates a two-tiered monetary system: state-led infrastructure for compliance, private innovation for utility.
Evidence: The ECB's digital euro proposal explicitly forbids programmable money for automated DeFi contracts, a core feature of Compound or Frax Finance. This design choice cedes the composability frontier to private, blockchain-native money.
case-study
THE HYBRID FUTURE
Case Study: The Cross-Border Payments Blueprint
Central banks are entering the digital currency arena, but their success hinges on leveraging, not supplanting, the existing private stablecoin infrastructure.
01
The Problem: Legacy Correspondent Banking
The SWIFT-based system is a black box of nested intermediaries.\n- Settlement takes 2-5 days with opaque fees.\n- Liquidity is fragmented across nostro/vostro accounts, tying up capital.\n- No programmability for conditional logic or atomic delivery-vs-payment.
3-5 days
Settlement
3-7%
Avg. Cost
02
The Solution: CBDC as a Wholesale Settlement Rail
Central banks will issue wholesale CBDCs as a risk-free, 24/7 settlement asset for interbank transactions.\n- Private stablecoins like USDC and EURC become the user-facing layer.\n- Enables atomic swaps on permissioned DeFi rails (e.g., Aave Arc, Compound Treasury).\n- Reduces systemic risk by collapsing settlement finality to ~seconds.
24/7
Availability
< 10s
Finality
03
The Catalyst: Private Sector Liquidity & UX
Stablecoin issuers (Circle, Tether) have a $160B+ head start in distribution and developer tooling.\n- On/off-ramps and wallets are already built for USDC, not a hypothetical CBDC.\n- Composability with DeFi protocols like Uniswap and Curve provides instant FX markets.\n- CBDCs will co-opt this network effect, acting as the reserve backing for regulated stablecoins.
$160B+
TVL Head Start
10x
Dev Adoption
04
The Blueprint: Project mBridge & Regulated DeFi
Initiatives like the BIS's mBridge prototype the model: a multi-CBDC platform for cross-border payments.\n- Private institutions act as validating nodes, bridging to local stablecoin pools.\n- Creates a two-tier system: wholesale CBDC for settlement, compliant stablecoins for retail/enterprise.\n- This mirrors the evolution of Layer 2s (e.g., Arbitrum, Base) building on Ethereum's security.
-80%
Cost Potential
47
Participant Jurisdictions
takeaways
THE REALIST'S GUIDE
TL;DR for Builders and Investors
CBDCs will not kill private stablecoins; they will create a new, regulated on-ramp that private rails will leverage for scale and compliance.
01
The Problem: Regulatory Capture of the On-Ramp
CBDCs will become the mandatory, KYC'd settlement layer for large-value transactions. This isn't about banning USDC; it's about controlling the primary entry point. Private stablecoins become a secondary, programmable layer on top.
- Key Benefit 1: Clear regulatory perimeter for builders.
- Key Benefit 2: CBDC rails provide a trillion-dollar liquidity pool for private protocols to tap.
100%
KYC'd
$1T+
Liquidity Pool
02
The Solution: Private Protocols as the 'Execution Layer'
Think UniswapX or CowSwap for sovereign money. CBDCs handle the regulated settlement, while private smart contracts (on L2s, Solana, etc.) manage the complex logic: AMM swaps, lending, and cross-chain intents via LayerZero or Axelar.
- Key Benefit 1: Innovation stays in private networks.
- Key Benefit 2: ~50-100ms finality for complex DeFi operations vs. CBDC base layer slowness.
~100ms
DeFi Finality
L2/Solana
Execution Venue
03
The Investment Thesis: Infrastructure for Programmable CBDCs
The big money isn't in issuing a stablecoin; it's in building the pipes. Winners will be RWA tokenization platforms, privacy-preserving mixnets for compliance, and interoperability hubs that bridge CBDC zones to Ethereum and beyond.
- Key Benefit 1: Non-sovereign moat: Tech stack is jurisdiction-agnostic.
- Key Benefit 2: Recurring B2B revenue from central banks and large institutions.
B2B
Revenue Model
Global
Market
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall