Central Bank Digital Currencies (CBDCs) vs. Cryptocurrencies: Knowing the Difference
“Most people are confused over the difference between CBDCs and cryptocurrencies as there is a lot of dust that is to be cleared. We would here delve into the dust clearing exercise by understanding both types of currencies and their differences.”
What are CBDCs?
The Central Bank Digital Currencies are the electronic form of cash. It is the portrayal of the fiat currency of a country or a region in digital form. This form of digital currency can be used in conducting payments by the individuals or businesses in the same manner as done in cash. The most important part of CBDCs is that they are centralized in nature and are governed by the Central Bank of a Country who has the authority to issue and regulate its activities.
Cryptocurrencies are also digital form of currencies that can be used to make payments and can be used to achieve many more things that will be discussed below
How are they Different?
Though, both cryptocurrency as well as CBDCs are digital currencies there is a huge difference between them:
The major difference between the cryptocurrency and the CBDCs is that the cryptocurrency are decentralized in nature that means they are not governed by any governing authority whereas CBDCs are centralized in nature and are governed by the central bank of the country which issues them.
The cryptocurrency ledger provides for the utmost transparency of the transactions being executed on the blockchain. This transparency helps the users in ensuring the transactions are fairly executed on the blockchain. The CBDCs will also provide transparency in transactions but as they are governed by the central authority, the transparency will power the governments rather than the users making it more prone to manipulation and control.
The users of the cryptocurrencies can remain anonymous or pseudo anonymous and there is very less possibility of tracking the transactions back to the users themselves. This has been the main concern of the Governments around the world as this anonymity can be used for money laundering and in the act of crimes. The CBDCs wallets on the other hand will have the user identities linked as is in the case of the banking system ensuring no wallet is anonymous and every transaction can be tracked.
The Central Bank Digital Currencies have their use limited to payment service only whereas the cryptocurrencies and the blockchain technology have multiple use cases that are being explored every day and more and more use cases are being identified on a regular basis.
Though both the currencies are digital in nature but have a fundamental difference. The cryptocurrencies are digital currencies that work on the concept of cryptography and have numerous use cases whereas the CBDCs are equivalent to digital cash that can be used for payment only. Cryptocurrency is the concept of decentralization whereas CBDCs are being created to make the financial system even more centralized. Which will win, is in the future to unravel.
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
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