What is the difference between Blockchain-based CBDC and Cryptocurrency?

• Ayushi Abrol
• February 25, 2022

As the cryptocurrency sector develops, both Cryptocurrency and CBDCs have attracted the interest of popular audiences. However, despite their common position as ‘digital assets,’ there are some significant distinctions in issuing and managing them.

 

Before delving into CBDC vs. Cryptocurrency, we first understand the two concepts. 

 

Central Bank Digital Currency (CBDC): An Overview

 

The Central Bank Digital Currencies, similar to cryptocurrencies like bitcoin, are digital tokens issued by a central bank. They are linked to the value of the fiat currency of that country.

CBDCs are developing in several nations, and some have already integrated them into their monetary systems. Because so many nations are looking into how to make the switch to digital currencies, it’s critical to grasp what they are and what they signify for society.

 

CBDCs Functioning

 

A country’s government issues its own currency, known as fiat money. Banknotes and coins were used as a medium of exchange and to trade goods and services. However, thanks to technology improvements, governments and financial institutions have been able to migrate from actual fiat money to a credit-based fiat paradigm in which holdings and operations are digitally recorded. And is also making cryptocurrency trading simple and reliable.

 

Although physical cash is still traded and acknowledged, its use has declined significantly in several wealthy countries. Furthermore, the COVID-19 pandemic has hastened the move to digital payment systems.

 

The emergence and development of cryptocurrencies and blockchain technology has increased interest in cashless societies and digital currency. As a result, governments and central banks throughout the world are considering the use of government-backed digital currencies. These currencies, like fiat money, would have the full trust and support of the government that issued them if and when they were adopted.

 

Objectives of CBDC

 

Many countries lack access to banking services. More than 5% of families (almost 7 million) do not utilize banks in the United States alone. Around 20% of US households have bank accounts but rely on expensive payment orders, payday loans, and check-cashing services.

CBDCs’ primary purpose is to provide privacy, transferability, ease, accessibility, and financial security to companies and consumers. CBDCs also minimize the maintenance required for a complicated financial system, cut cross-border transaction costs, and give lower-cost choices to people who now utilize other money transfer methods.

 

A CBDC also provides a method for a country’s central bank to undertake monetary policies that promote stability, limit growth, and impact inflation.

Digital currencies issued by central banks would also minimize the dangers associated with utilizing digital currencies in their current form. Cryptocurrencies are very volatile, with their value shifting all the time. This volatility may generate significant financial hardship in many people and jeopardize an economy’s overall stability. CBDCs, backed by the government and supervised by the central bank, would provide a reliable means of exchange for homes, consumers, and enterprises.

 

Reviewing Cryptocurrency

 

The majority of blockchain fanatics are well-versed in cryptocurrencies and how they operate. But, for the sake of comparison with CBDCs later, let’s give a quick but thorough review.

 

Cryptocurrencies are non-permissioned decentralized digital assets housed on public blockchain networks. They have a limited or limitless quantity, and in certain cases, users may acquire tokens by directly supporting the network, with mining and staking being the two most prevalent methods.

 

Even if they are not active users, anybody may join a crypto blockchain network and view its status. Furthermore, anybody may become a miner, and there are no specific prerequisites for running a node.

 

All users on a blockchain network, such as Bitcoin, have the same privileges, authority, and power. There aren’t any unusual figures. Lastly, the network operates by obtaining consensus among all of its participant nodes on the status of the ledger.

 

Cryptocurrencies are classified as both assets and currency in terms of use cases. Individuals can participate in investment markets to speculate on the price behavior of a cryptocurrency. They may also use particular projects like Bitcoin as a store of value asset to shield themselves from inflation and economic instability.

 

Those who choose to utilize cryptocurrencies as a means of exchange are free to do so. Bitcoin and Ethereum may be used by anybody to perform transactions and payments. Today, more merchants and stores accept cryptocurrency payments than ever before. Keeping this in mind, decentralized digital commodities have also shown to be effective as online money.

 

CBDC vs. cryptocurrencies: key distinctions

As we’ve seen, there are several contrasts between CBDC’s and cryptocurrencies.

 

Central banks manage and run centralized digital currency, whose blockchain network can only be viewed and interacted with by authorised financial institutions. CBDCs may only be used to make payments, and any type of hoarding or investing activity is strictly prohibited.

 

There is no restriction on the usage due to the unavailability of a centralized authority. Furthermore, its supply has historically been restricted, and it cannot be altered without the approval of a majority of users.

To make things clearer, let’s compare cryptocurrencies to CBDCs.

 

Type of blockchain: 

CBDCs operate on authorized (private) blockchains, whereas cryptocurrencies operate on permissionless (public) blockchains. The former is centralized, whereas the latter is not.

 

Anonymity: 

Anonymity is a benefit for cryptocurrency users. CBDC customers’ identities will be linked to an existing bank account as well as a similar quantity of personal information.

 

Decentralization: 

A central bank determines the regulations for CBDC networks. The authority in crypto networks is given to the user base, which makes choices through consensus.

 

Use Case: 

CBDCs can only be used for payments and other monetary transactions. Cryptocurrencies may be used for both speculation and payment.

 

Scalability: 

CBDCs can theoretically scale better than cryptocurrencies since they function on permissioned networks similar to databases. We haven’t had a chance to test if that’s possible yet because no CBDC has yet to launch.

 

Can they coincide?

 

Indeed, a number of countries have made significant efforts to regulate and “institutionalize” cryptocurrencies. However, as central banks move closer to introducing their own digital currencies, there is a clear pattern of rules growing increasingly stringent.

 

The debate about CBDC vs. cryptocurrency goes well beyond basic performance. Instead, you should consider whether both sorts of digital currency can coexist.

 

This is evident in the instance of the Reserve Bank of India. This major central bank advocates for a statewide crypto ban while collaborating with the government to create legislation that would provide legal backing for the creation of a digital rupee.

 

Banks may simply argue against decentralized currencies with the same old arguments.

 

If we continue in this manner, nothing will be able to halt the anti-crypto propaganda machine. And if the people fall for it, as they have in the past, the existence of cryptocurrencies will be jeopardized. Will we be able to put a stop to it, or will TPTB rule supreme?

 

Conclusion

 

In the case of CBDC vs. cryptocurrency, there is no compelling reason for backing central bank digital currencies. On the plus side, they will pave the path for further digital asset adoption. However, it may come at the expense of traditional cryptocurrencies being subjected to stringent regulations, if not outright prohibitions.

 

CBDCs introduce a slew of drawbacks that degenerate cryptocurrencies in ways that no one has ever done before. We might reasonably applaud them for their theoretical scalability, but it is nothing to be proud of when customers lose their beloved decentralization.

 

If you are a rookie in the crypto realm with an unclear vision of the crypto concept, then you can always seek expert guidance. However, if you wish to create self-awareness and excel in the field, then you can sign up for some relevant cryptocurrency course.