What are the differences and similarities between CBDCs and cryptocurrencies?

There has been a lot of talk about cryptocurrencies and CBDCs in the last few months. On one hand, governments worldwide are hard at work, trying to effectively regulate cryptocurrencies. On the other, they are also racing to develop their sovereign CBDCs.

But what are CBDCs, and how are they different from cryptocurrencies?

The first thing you need to know is that cryptocurrencies and CBDCs are like brothers. They are born out of blockchain technology and share some basic characteristics but are also very different from each other.

How cryptocurrencies are changing the face of charity

Let's take a deeper look at both these virtual forms of money and understand how they compare to each other.

A cryptocurrency is a digital asset that functions as a store of value and medium of exchange in a decentralised network. This means that there is no central governing authority controlling these assets.

Cryptocurrency transactions are stored on a blockchain, which is nothing but a publicly distributed ledger. This ledger contains all the details of all the transactions made on the network. Users can volunteer to become nodes and save a copy of this ledger on their system. All other users have access to this ledger and can view all the transactions stored within it.

Also Read: Carbon emission from cryptocurrencies pose a threat to the planet, says IPCC

Cryptocurrencies also act as investment instruments. However, their prices are volatile and are dictated by market participation.

A CBDC or Central Bank Digital Currency is a virtual form of a country’s fiat currency. They are a store of value and can be used to make digital payments for goods and services. They are issued and controlled by the central bank of a nation.

CBDCs use blockchain technology to verify and store transaction data. However, they operate on a private, permissioned network. This means that the general populace won’t be able to take part in the verification process, and the transactional data will not be disclosed to them.

Instead, nodes are chosen by the central bank to participate in the verification process. These nodes will most likely be banks and other financial institutions that facilitate transactions in the system.

Both cryptocurrencies and CBDCs are virtual assets that exist in online infrastructure. They both reduce the need for physical cash and streamline paying for goods and services. They also use the basic concept of blockchain technology, like storing transaction data in blocks and using nodes to verify transactions. But their similarities end here as the blockchains they run are very different from each other.

Another core difference between the two is that cryptocurrencies focus on decentralisation. They remove the need for a central authority to facilitate transactions. They act as an investment vehicle too.

Also Read: Crypto is like 'casino' & gains should be taxed at 50%: Ex-Bihar FM Sushil Modi

On the other hand, a CBDC, while utilising the transparency and security that blockchains provide, is still entirely centralised. A central bank oversees and facilitates the transactions with the help of other third-party organisations. And unlike cryptocurrencies, CBDCs act only as a means of transferring value.

In a nutshell, cryptocurrencies are private money, whereas CBDCs are government-backed forms of money.

Other differences include:

They utilise different kinds of blockchains. CBDCs use a private permissioned blockchain network, while cryptocurrencies use a permissionless open network.

Users that use cryptocurrency have anonymity when they make transactions on the network. However, CBDCs will be attached to a person’s existing bank account, which will contain their personal information.

A central authority controls CBDCs, so scaling the network is much easier. In a cryptocurrency network, nodes have to reach a mutual consensus to change any aspects of the network. This could present a challenge when the network needs to scale, but the nodes are not in agreement over the way forward.