Several countries have started acknowledging different forms of digital currencies such as cryptocurrencies, virtual currencies, central bank digital currencies, and e-cash. When you talk about Cryptocurrencies vs. Central Bank Digital Currencies, they are quite different from each other.
Many central banks are competing with one another for releasing Central Bank Digital Currencies for reshaping the world economy after the outbreak of coronavirus pandemic. The significant difference between Crypto and CBDC is that the CBDC is centralized, and the central banks keep control of this type of digital currencies while cryptocurrencies are decentralized. Bitcoin is an example of cryptocurrencies.
China has been a leading country for aggressively promoting Digital Yuan. The central banks of many powerful countries, including the Federal Reserve and the European Central Bank, have been continuously researching the pros and cons of implementing CBDC in their respective countries.
There have always been discussions regarding the future of cryptocurrencies. There is a bubble in the market, and it can crash anytime. People are always cautious about buying and selling cryptocurrencies. Many countries don’t allow the trading of cryptocurrencies in their states.
Though cryptocurrencies have been growing worldwide, with the recent announcement by Facebook to launch Libra, a Cryptocurrency, the central banks are worrying about this news. Facebook is getting into the world of finance, and more than 2 million people are ready to leverage Libra. It is a big step for Facebook to enter into the global monetary system.
Let’s understand the Crypto vs. CBDC in detail as below.
- Regulation: The central banks fully regulate the Central Bank Digital Currencies. They work closely with the other financial institutions and delegate transaction approvals later in a decentralized system. The CBDC is entirely centralized, and the central banks issue these. On the other hand, Cryptocurrencies like Bitcoin are wholly decentralized, and various distributed nodes are incentivized to maintain the network through block rewards.
- Security: CBDC is less likely to provide security than cryptos. Because they are more prone to cyber-attacks, hackers worldwide always keep an eye over the CBDC and make cyber-attacks for stealing the money of several customers. However, cryptos are also not entirely secure. There is more possibility of chain — wise attacks on your wallets and the addresses. So, you can’t deny the weakness in blockchain also for security purposes.
- Privacy: Privacy is something that everyone expects in financial transactions. However, the Central Bank Digital Currencies are likely to give less respect to your data privacy. The central banks are the regulatory authorities that keep the detailed records of their customers, such as name, address, mobile number, income, and many more. At the same time, cryptos are controlled independently through peer to peer interaction. The customers have the full right to provide limited information for sharing for financial transactions. Though maintaining private data is also essential for avoiding fraudsters.
- Autonomy: There is full autonomy in the case of cryptos because they are independently regulated. The central banks are infused to the regulatory bodies and don’t provide much autonomy like cryptocurrencies. They work freely and don’t have any obligation as the central banks do have regarding the completion of several financial norms.
- Philosophical: The philosophy behind the use of CBDC is to overcome the broken financial system, provide more financial autonomy to the individuals, and bring transparency with trust in the financial system. The CBDC will grow more and will try to supersede cryptos for overcoming its pitfalls.
The Central Bank Digital Currencies (CBDC), such as the digital euro and digital yuan, are backed by their respective central banks and may become a reality over time in coming years. However, Cryptocurrencies like Bitcoin and Ethereum promise more security but less volatility. If they want to last for a long time, they will have to abide by financial institutions’ rules in their respective countries.
CBDC is a direct liability of the central bank because foreign reserves back them. On the other hand, Cryptocurrencies are issued by the private sector, and they may not carry the liability of the central bank or the government. Cryptocurrencies use strong cryptography, especially a blockchain, when it wants to serve financial database exchanges.
So, you would have witnessed the difference between Cryptocurrencies vs. Central Bank Digital Currencies. They have a good scope in the future. Many countries are trying to work on the Central Bank Digital Currencies framework for the people’s convenience. However, the trading of Cryptocurrencies in some countries is also increasing rapidly. They seem to co-exist together for long until the central governments find any flaw for further improvements. Do a thorough analysis before making any decision for trading in Cryptocurrencies or Central Bank Digital Currencies.