It is very easy to confuse CBDCs for mainstream cryptocurrencies. This confusion between them is justified, owing to CBDCs being similar to cryptocurrencies in many ways. Some similarities include
The differences, however, are quite glaring as you will soon see. To explain the differences more clearly, it is better to first explain what CBDCs and cryptocurrencies are, at the bottom.
CBDC is an acronym for (Central Bank Digital Currency).
Understood. But what are they exactly? CBDCs are digital currencies, much like conventional cryptocurrencies. Only that they are issued by a country's central bank, and therefore its government.
To understand CBDCs, it is easier to imagine cryptocurrencies, created by a country's government as a replacement or a means to support their existing currency. CBDCs in essence, are fiat cryptocurrencies.
Most countries are developing CBDCs, and some are even starting to use them.
Cryptocurrencies are digital currencies, with actual real-world value. They exist on virtual ledgers that keep a record of every single transaction. This ledger is called the blockchain.
Cryptocurrencies are created using blockchain technology and are secured by cryptography. This means that they are impossible to duplicate or counterfeit.
They are unregulated and are not controlled by governments or central bodies of any kind. This makes them one of the most secure forms of money. Some of the most popular cryptocurrencies include bitcoin and Ether (Ethereum).
Now that both CBDCs and cryptocurrencies have been explained, it is worth mentioning that some major differences exist between them. Here are three of the biggest.
This is perhaps the biggest difference between crypto and CBDC. While cryptocurrencies are fully decentralized and uncontrolled by governments or any central bodies, CBDCs are government-issued.
A central bank and therefore the government oversees and controls the use and distribution of a CBDC. This means that seizure, confiscation and monitoring are huge possibilities with CBDCs. In a nutshell, cryptocurrencies are decentralized and private, while CBDCs are centralized and private.
While users of cryptocurrencies can remain completely anonymous when they use or buy these coins, records of CBDC use are permanently tethered to their user's existing bank accounts.
By extension, anyone with the right security clearance can get access to records of a CBDC user's spending, how much they currently have, as well as where and how these funds were spent. Anonymity and CBDCs are in essence, incompatible.
Consensus algorithms in the cryptocurrency world refer to the algorithm that makes the decentralized record-keeping of a blockchain easier.
Essentially, the consensus algorithm is a protocol through which all the nodes in the blockchain come to a mutual agreement about the current state of the network.
For CBDCs, this ledger is owned and controlled by the government of the country in which they are issued. This might be an advantage for CBDC users in terms of scalability.
On a regular cryptocurrency network, challenges might arise when the network needs to scale, but the nodes are not in agreement.