El Salvador recently became the first country to adopt Bitcoin as a legal tender. While on the other side of the globe, after concluding its love-hate relationship with Bitcoin and other cryptocurrencies, China has taken a bold stance on central bank digital currencies by announcing ambitious plans to establish its digital currency, the digital Yuan (also known as e-CNY). Likewise, the European Central Bank and the Federal Reserve are working together on studies to assess the benefits and drawbacks of CBDC implementation.
The implementation of CBDC, besides Bitcoin adoption, has been one of the hottest discussions all over the world by the nations that wish to move forward in this direction. What is the difference between today’s popular cryptocurrencies and future central bank digital currencies that have not yet been released? Is either solution decentralised, and if not, who will rule the world?
It is essential to know and understand the differences between the two, and that is what this article aims to show to the readers.
What is cryptocurrency?
A cryptocurrency is a virtual currency represented by an encrypted data string. ‘Blockchain’, a peer-to-peer network, oversees and organises it, as well as serving as a secure log of transactions such as buying, selling, and transferring. Cryptocurrencies, unlike real money, are decentralised, meaning governments or financial organisations do not issue them.
Bitcoin, Ethereum, XRP, Dogecoin, and Cardano are among the most popular cryptocurrencies.
Benefits of holding cryptocurrencies
- Convenience – It has a real-world application. Transactions are quicker, easier, and frequently less expensive than they are with fiat currencies, especially if you are sending money across borders. Cryptocurrencies fluctuate, but they are not as influenced by exchange rates as fiat currencies are.
- Ownership – Digital currencies allow you full control over your assets’ security by eliminating the need for a third party. You will not lose money as a result of a bank’s mistake.
- Transparency – Personal information is not required for cryptocurrency transactions. Cryptocurrencies are unquestionably more private than traditional money. You can trace all of your transactions and know precisely where your money goes.
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How about the risks?
- Security – Hackers remain a big issue, even though the blockchain technology that underpins all cryptos is recognised for its security benefits. Cybersecurity experts work tirelessly to combat hackers who attempt to regularly steal digital assets from consumers and crypto exchanges.
- Volatility – It is another big concern of most cryptocurrencies. Prices can drop dramatically in a matter of hours. It is impossible to predict how much your assets will be valued in two weeks. It makes trading and investing much more difficult. You must devote more time to following the news and evaluating pricing.
What is CBDC?
CBDC, or Central Bank Digital Currency, is a virtual representation of a country’s fiat money that is represented by an electronic record or digital token. A CBDC is a centralised currency, meaning it is issued and regulated by the country’s monetary authority. Several countries are investigating the feasibility of establishing and issuing CBDCs, although no country has done so formally.
Benefits of implementing CBDC
- Less cost – CBDCs make local and international transfers almost instantaneous, and they come at a lower cost than traditional methods. CBDCs will significantly decrease the task of verifying money or risk-monitoring on any financial platform since they are true fiat currency in digital form.
- Security – CBDCs provide greater hurdles to any criminal activity than real cash when it comes to protection.
How about the risks?
- Privacy – Because of its centralised design, a CBDC may be a potentially intrusive infringement on customer privacy and protection, particularly if provided at the retail level or by an unfavourable government.
- Non-decentralisation – Closed-loop systems or false blockchains would almost certainly be employed in a CBDC issued and maintained by a central authority, simulating the same cyber and other potential manipulation vulnerabilities that decentralised systems were supposed to solve.
As we have seen in their given definitions, a cryptocurrency’s blockchain type is decentralised while CBDC is centralised—and there are more than a few differences that we were able to see above. Below is the summary of all the pointers mentioned earlier.
The Differences Between Cryptocurrency and CBDC
- Use case – CBDCs can only be used for monetary transactions and payments. Cryptocurrencies may be used for both speculative and payment reasons.
- Anonymity – It is a benefit of cryptocurrency users. Meanwhile, CBDC customers’ identities will be linked to an existing bank account and a similar quantity of personal data.
- Decentralisation – The restrictions for CBDC networks are set by a central bank. Meanwhile, the authority is assigned to the user base on crypto networks, which makes choices by establishing a consensus.
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