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Komal Motwani On Stablecoins, Volatility, & The Question of Central Bank Digital Currency’s

Financial expert and Certified Financial Planner Komal Motwani has seen a variety of situations manifest themselves in the wake of the digital revolution. Her expertise in financial planning and investment strategy has led her to write countless articles and pieces that explore the various virtues of digital assets and the issues that have propagated therein.

She took the time to sit down and answer a few questions about the concept of Stablecoins, how crashes occur as well as the rise of Central Bank Digital Currencies as a correction to decentralization.

Hello Komal, thanks for answering a few questions, let’s get right into it with an exploration into Stablecoins, can you explain in layman’s terms what a Stablecoin is?

Stablecoins are a form of cryptocurrency that derive their value from other underlying assets or external reference and is pegged or tied to this asset/reference. This can be in the form of another currency, commodity, algorithmic formula, or other financial instrument.

As an example, a Stablecoin could be pegged to the U.S Dollar or the price of Gold. They are known as ‘stable’ due to this pegged asset feature, maintaining the reserve assets to control the supply and therefore provide a slightly more reliable alternative to current cryptocurrencies like Bitcoin.

There have been many discussions by industry pundits on both sides of the cryptocurrency revolution who refer to Stablecoins being well, not so stable, can you give us a little context into just how crashes can occur in the digital currency space?

Cryptocurrency as a whole is still a very wild west mentality, where anything and everything has the potential to occur as we have seen with the recent Bitcoin crash. As there are a range of different pegged asset types that can be attached to Stablecoins, the reasons for crashes can vary wildly. A recent example being the TerraUSD collapse in May 2022 is an example of an algorithmic-backed Stablecoin overcorrecting for a demand in supply which cause the value of the Stablecoin to plummet to below its intended ratio of 1:1.

Hackers also have a big part to play in the demise of certain assets and Stablecoins who can exploit loopholes and bugs that naturally come from rushed mergers and newly formed coins and platforms. Earlier on the Stablecoin from DeFi platform Acala dropped 99% of its value as hackers exploited a bug and minted just under 1.3 Billion tokens which caused the value to dip dramatically.

How can an investor safeguard, or at least reduce the level of risk in their investments in the current market?

Investors and creators have a responsibility to back-test and safeguard from bugs as much as possible before delving into a new project or new release. The current market is awash with projects that are either rushed, or bug-riddled which can cause mayhem and crashes by hackers and bad actors.

For investors, taking the time to research a project and ascertain a sense of how reliable and sturdy the project is before investing in it is a wise move. If you’re looking at Stablecoins, check the asset they are pegged to and see how the platform/coin safeguards itself and back-tests. Invest in the projects you have researched and believe in rather than the one’s that have volatile upside.

What is your take on the Central Bank Digital Currencies (CBDC), are they simply the institutional response to the decentralized crypto market? Or a natural next step in mainstream banking?

This will be a debate that will rage on for months and years to come I suspect. CBDC has been described as ‘just another flavor of fiat’ which does hold a little bit of water when you look at the two disciplines of digitized currency side by side. It can be argued that CBDC’s are centralized banking networks and institutions playing catch up to the increasingly popular crypto market. As most transactions are occurring digitally anyway, the notion that Governments and banking institutions would be delving into the realm of digitizing their currency makes perfect sense.

There are people who are detracting from CBDC’s due to the potential loss of privacy, and further centralization that could be ascertained by these currencies becoming the status quo.

Is it true that Cryptocurrencies and CBDC’s both operate using blockchain technology? If so, what would be their fundamental difference?

In short, Centralization and decentralization. The fundamental principle behind cryptocurrency is that of decentralization and unrestricted movement of value. Operating with the drive of personal sovereignty and privacy – crypto backers are worried about the potential side effects and levels of control that centralized banks may have if they get a stranglehold of the digital currency marketplace.

While they both operate with blockchain technology to some extent, they are anything but the same. There are arguments toward the volatility of cryptocurrency being one of the primary reasons for more countries adopting their own CBDC’s, but there will always be speculation surround true intention.

As a CFP®, how do you see the future of the economy in terms of a centralized or decentralized system? Or even a combination of both?

I am not sure where this market is headed but I am keeping a steady eye on the arguments from both sides of the aisle to ascertain where we could see our economy headed. As paper and physical forms of money are becoming less prevalent, it makes sense to consider digital currency to be the norm sooner than we thought.

As for the question of centralized or decentralized – that will ultimately be determined by the market. Though, Cryptocurrency’s and CBCDs may use similar platforms like “Blockchain Technology.” CBDCs however are not crypto currencies. Unlike crypto currencies (such as Bitcoin) that are decentralized and volatile in valuation, CBDCs are not as volatile as their value is pegged to the country’s currency and issued by Central Banks.

As long as there is logic being impressed by investors and institutions, we will see which way the tide falls.

What is it about the digital revolution, Stablecoins, and CBDC’s that has captured your interest the most?

I am fascinated by people’s ability to adapt and survive with an incredibly fast-changing economy and with changing regulations therein. Cryptocurrency truly changed how we perceive the economy to be run, and Stablecoins and CBDC’s seem to be a market correction by the centralized institutions.

I am interested in seeing where this leads.

Thank you Komal for your time!

You can follow up with Komal Motwani at https://www.komalmotwani.com