There have been a lot of discussions recently about cryptocurrencies and CBDCs. On the one hand, governments worldwide are brutal at work attempting to regulate cryptocurrencies properly. On the other hand, they rush to establish their own sovereign CBDCs. However, what are CBDCs, and what differences them from cryptocurrencies?
To begin, you should understand that cryptocurrencies and CBDCs are related. They were created using blockchain technology and share some fundamental qualities but are also rather distinct from one another.
What are Cryptocurrencies?
A cryptocurrency is a digital asset that serves as a medium of exchange and a store of value in a decentralized network. This implies that there is no centralized authority in charge of these assets.
Transactions involving cryptocurrencies are recorded on a blockchain, nothing more than a decentralized ledger. This ledger holds all of the details of all network transactions. Users can sign up to become nodes and download a copy of this ledger on their machine. Other users can access this account and view all of its transactions.
Cryptocurrencies can potentially be used as investment vehicles. On the other hand, their prices are changeable and are determined by market activity.
What is a CBDC?
A CBDC, sometimes known as a central bank, “Digital Currency,” refers to a virtual representation of a country’s fiat currency. They serve as a medium of exchange and can be used to make digital purchases of products and services. They are issued and managed by a country’s central bank.
CBDCs verify and store transaction data using blockchain technology. They do, however, function on a secure network. This means that the general public will be excluded from the verification process and will not have access to transactional data.
Rather than that, the central bank selects nodes to participate in the verification process. These nodes are banks and other financial organizations that enable system transactions.
Similarities Between CBDCs and Cryptocurrencies
Both are online infrastructure-based virtual assets and eliminate the need for real cash and simplify purchasing products and services. They also use the fundamental concepts of blockchain technology, such as storing transaction data in blocks and verifying transactions via nodes. However, their similarities end there, as the blockchains on which they operate are somewhat distinct.
What are the differences between cryptocurrencies and a CBDC? Another significant difference between the two is that cryptocurrencies are concerned with decentralization. They do away with the requirement for a centralized authority to facilitate transactions. They also serve as an investment vehicle.
On the other side, while a CBDC benefits from the transparency and security provided by blockchains, it remains centralized. With the assistance of other third-party organizations, a central bank supervises and facilitates transactions. And, unlike cryptocurrencies, CBDCs serve solely as a medium of exchange.
In a nutshell, cryptocurrencies are unregulated private money, whereas CBDCs are regulated forms of government-backed money.
Additional Differences Include the Following:
- They make use of several types of blockchains. CBDCs operate on a private blockchain network, whereas cryptocurrencies operate on an open network with no permissions.
- When users of cryptocurrencies conduct transactions on the network, they maintain their anonymity. CBDCs, on the other hand, will be linked to the individual’s existing bank account, which will hold their personal information.
- CBDCs are centralized, which makes scaling the network much more accessible. Nodes in a cryptocurrency network must obtain mutual consensus to modify any network component. This could cause a problem if the network requires scaling, but the nodes cannot agree on how to proceed.
Most countries are developing this sophisticated and safe digital currency. The central bank itself stated last month in a report that it intended to create a new digital currency after a three-year feasibility assessment. They thought that they would be able to streamline transactions and attract more users to the digital platform by doing so.
The most excellent part is that we can use this digital currency in the same way that we would a credit card for online purchasing and shopping, and not only that, but the central bank’s check will assist people in avoiding black money.
According to studies, most countries have determined that establishing their own central bank digital currencies would significantly boost their global GDP.
Additionally, the World Bank stated that digital currency has the potential to boost our country’s GDP and improve the efficiency of cross-border transfers.
It was introduced in the twentieth century by the US Federal Reserve Bank to increase the accessibility of digital cash. However, since the concept of digital currency has grown in popularity, it is now being discussed by all central banks.