Crypto vs. CBDC: Difference between Blockchain-Enabled CBDC and Other Crypto

Digital currencies issued by central banks are now one of the most innovative financial developments in the world. The financial services industry and the media have shown a lot of interest in CBDCs. The People's Bank of China has announced that existing cash will be phased out in the near future in favour of new digital currencies. Similarly, the European Central Bank has proposed many ways to integrate CBDC into their financial ecosystem.

Simultaneously, the Banque de France has released a request for proposals to investigate the possibility of adopting digital currency, signalling that CBDCs are becoming more popular. As a result, the Crypto vs. CBDC controversy and its implications for the broader financial system have perplexed many central banks.

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What is a CBDC?

A central bank digital currency (CBDC) is a virtual currency that is issued by a central bank and is based on blockchain technology.

Based on data from the European Central Bank's report on the digital euro and news reports about China's digital yuan, we can infer that CBDCs are private digital currencies created to exchange value through digital transactions. The field of digital payments sees the most use.

What is Cryptocurrency?

Cryptocurrencies are non-permissioned, decentralised virtual assets stored on public blockchain networks. Users may earn tokens by directly supporting the network in certain cases, with mining and staking being the two most popular methods.

Crypto Vs CBDC

On the one hand, we have a centralised digital currency operated by a central bank, with a blockchain network that can only be accessed and interacted with by a small number of financial institutions. CBDCs may only be used for payment, and any hoarding or investment is strictly forbidden.

Cryptocurrencies, on the other hand, are decentralised digital assets that are hosted by a permissionless, open blockchain network that everyone may access. Cryptocurrencies may be used for both financial and speculative purposes. There is no centralised authority that can oversee their application. Furthermore, their supply has always been restricted, and it cannot be altered without the consent of a majority of users.

Core differences

The kind of blockchain CBDCs use permissioned (private) blockchains, while cryptocurrency blockchains are permissionless (public). The former, unlike the latter, is a centralised entity.

No one knows who you are. For cryptocurrency users, anonymity is a big plus. The identities of CBDC users will be connected to an existing bank account and a similar amount of personal information.

Decentralization is a term that many people use to describe the process A central bank establishes guidelines for CBDC networks. On crypto networks, the control is delegated to the user base, which makes decisions by consensus.

Consider the following scenario: CBDCs can only be used for cash and transfer transactions. Cryptocurrencies may be used for speculating as well as for making payments.

Wrapping up

There is no convincing argument for supporting central bank digital currencies over cryptocurrencies in the CBDC vs cryptocurrencies debate. On the plus side, they'd pave the way for further digital asset adoption. Orthodox cryptocurrencies, on the other hand, could face strict regulations and even outright bans as a consequence of this.

CBDCs have a slew of disadvantages that have the potential to devolve cryptocurrencies in unprecedented ways. We may praise them for their scalability potential, but there is little to be proud of when users give up their beloved decentralisation.

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