As the cryptocurrency market thrives and evolves, CBDCs and crypto coins like Bitcoin have piqued the interest of many. However, although they are both described as digital assets, crypto and CBDCs have differences in how they are controlled and issued. For instance, while cryptocurrencies are decentralized, CBDCs are centralized. Also, CBDCs are better known as the digital version of fiat currency.
This article will delve into what CBDCs and cryptos are and how they work. We’ll place both sides by side while highlighting their differences in the same vein.
What are CBDCs?
Central Bank Digital Currencies (CBDCs) are digital assets bearing similarities to cryptocurrencies. They are controlled and issued by the country’s central bank, with their value pegged to the country’s fiat currency’s value. Additionally, Some countries like China and the Bahamas have implemented their CBDCs while others are in the research phase.
Due to the volatility of cryptocurrencies and their financial stress, CBDCs were created. The value of crypto coins is constantly fluctuating, and using them may have adverse effects on the economic stability of a country. Therefore, CBDCs provide businesses, consumers, and households with a more stable exchange.
What are Cryptocurrencies?
Cryptocurrencies are virtual or digital currencies that are cryptographically secured, making them almost impossible to double-spend or counterfeit. Furthermore, they are decentralized currencies meaning they aren’t controlled or issued by central banks. Therefore, cryptocurrencies are immune to manipulation or interference by the government. Most cryptocurrencies are based on a digital ledger known as blockchain technology.
Cryptocurrency is a peer-to-peer system that enables convenient transactions. It has its name ‘crypto’ because it employs encryption for transaction verification. One advantage of cryptocurrencies is that it is secure and offers anonymity. Some common cryptocurrencies are Bitcoin, Litecoin, Ripple, Ethereum, etc.
Core Differences Between Cryptocurrencies and CBDCs
From the explanations above, you can spot some differences between cryptocurrencies and CBDCs. While one is an entirely centralized virtual currency, the other is decentralized. Here are some differences between both digital currencies.
Anonymity
Unlike users of CBDCs that have their transactions checked by the country’s central bank, crypto users enjoy anonymity. As a result, they can carry out transactions anonymously without the fear of being watched by the central bank.
Use case
Cryptocurrencies have several use cases, unlike CBDCs, which are only used for monetary transactions. For example, some cryptocurrency use cases include smart contracts, on-chain governance, crypto banking, asset tokenization, etc.
CBDCs can only be used for payments and other monetary transactions. However, users can use cryptocurrencies for speculative purposes and payments as well.
Type of blockchain used.
Most crypto coins use public or permissionless blockchains that are decentralized in nature. While CBDCs use private or permission centralized blockchain.
Centralization
Authority in cryptocurrencies is based on the decisions of the user base made after they have reached a consensus. However, this isn’t the same for central bank digital currencies, as the governing bank has the final say and calls the shots.
To Wrap It Up
CBDCs are not cryptocurrencies, although they are digital currencies. However, both digital currencies provide convenient means of carrying out transactions. However, countries with their digital currency are restricting the use of cryptocurrencies, as in the case of India’s central bank.
Conclusively, cryptocurrencies and CBDCs have essential roles in the economy. While both digital currencies have their advantages and they have some downsides. For instance, one advantage of CBDCs is that they further fuel the adoption of digital assets. However, they may cause the use of cryptocurrencies to be limited.
